Even in the wake of the 2008-2009 financial crisis, the fact remains that investors need growth to outstrip inflation and diversification to avoid the risk inherent in investing in one or two aggressive stocks. Growth-oriented mutual funds give smaller investors the opportunity to buy into a diversified, professionally managed portfolio of growth-oriented stocks.
With the meteoric rise of the mutual fund industry, investors have literally thousands of growth mutual funds from which to choose. An entire industry exists just to evaluate and rank fund performance. The sheer magnitude of your options can be overwhelming, however, and it is important to keep in mind that there is no one "right" choice.
Opening a mutual fund account is, in most cases, as simple as sending in a completed application with your initial investment. Some funds will waive the initial investment requirement if you establish an automatic investment plan. You will need to provide your name, residential address, social security number, and date of birth; all financial institutions are required to provide this information under the USA Patriot Act.
You should consider the following additional factors as you evaluate a growth mutual fund:
- Your current investments. A growth mutual fund will nicely round out a portfolio overweighted in conservative investments or cash. They can also nicely complement a value-oriented stock fund.
- The time frame for the cash you are investing. Growth mutual funds offer higher potential returns in the long-term, but are inappropriate if you are likely to need the cash in the short term.
- The type of account the investment is for. Provided that you have time to ride the ups and downs of the market, growth mutual funds are an especially good choice for college or retirement accounts. Investors seeking steady dividend income, however, should look elsewhere.
In the long-term, a well-managed growth mutual fund will generate superior total returns to funds investing in bonds or large-cap stocks. With these greater increases in value, however, come greater drops in the interim. It is vital that investors be realistic about their ability to both afford and tolerate these ups and downs. Investors looking at their mutual fund statements often come to treat their investment account as if it were a bank account, and get upset when their statement shows a lower balance. It may be more helpful to look upon your growth mutual fund investment as being more like a real estate holding, whose value fluctuates from day to day. Ultimately, the only such "value" that counts is the value on the day you buy and the day you sell.