The first lesson new investors learn when starting to invest in the stock market is that the best path to lasting and stable wealth is by investing in growing companies with large upside potential. One of the best and easiest way to accomplish this is by investing in growth stock mutual funds.
These types of mutual funds invest in the stocks of corporations who are expected to grow their earnings at an above average rate. You can find growth stock mutual funds that are based on credit quality, market capitalization, and industry.
You should review and compare funds according to various attributes prior to investing any capital. Online broker ETrade makes is easy to screen growth stock mutual funds based on your specific criteria for investing, as well as make the necessary comparisons to find the fund that is right for you.
Investing In Growth Stock Mutual Funds: What Constitutes A Growth Stock?
In finance, a growth stock is a stock that appreciates in value and yields a high return on equity. Return on equity is calculated by taking the company’s net income and dividing it by the company’s equity. Analysts expect to see at least a 15% return on equity in order to classify a stock as a growth stock.
Growth stock mutual funds specifically target the stocks of corporations who are in the growth phase of the business cycle. Keep in mind that by investing in growth stock mutual funds you should not expect a quick return on your investment. Growth stock require time to grow, and therefore growth stock mutual funds also need time to grow in value.
There are different categories of growth stocks and each will carry its own level of risk. Aggressive growth mutual funds tend to invest in small-cap and mid-cap companies, and tend to take on slightly more risk. There are also large-cap growth stock mutual funds that offer a lower level of risk, while also offering growth potential.
Steps For Investing In Growth Stock Mutual Funds
The first step in investing in growth stock mutual funds is to research potential investments. The easiest way to do this through online broker ETrade’s mutual fund screener. You can screen growth funds based on market cap, highest rated funds, and a variety of other customizable search options to find the fund that best fits your investment strategy.
When you have narrowed down the list of funds to potential investments you should then request a copy of the funds prospectus. The most important consideration is the fund’s net asset value – or NAV – which is the equivalent to the earnings-per-share number used to calculate an individual stock’s return. Look at the fund’s performance over time by looking at the NAV over a two to five year period.
Keep in mind that you should be comparing the same types of funds against each other as growth stock mutual funds vary in their objectives. In addition, make sure you are comparing companies with similar market capitalization.
Investing in growth stock mutual funds does involve significant risk, and you should consult with your financial adviser to find out if these types of mutual funds are right for you.
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