Each mutual fund has it’s own unique investment strategy and approach that it uses. There are two very basic approaches when it comes to many of these funds. One is value funds and the other are growth funds. There are also funds that are a hybrid of the two.
Value funds are interested in finding companies that have good fundamentals, which means they are inherently good companies. The value investor then looks at how the market is valuing this company. If the market is undervaluing this stock with good fundamentals, they consider it a good deal. They buy that stock in expectation that eventually the market will come to their senses about the value of the stock and raise the share price.
Now growth mutual funds on the other hand have a different investment strategy. They look for stocks that have the potential to produce hot growth or extraordinary growth over time. In essence, they are trying to manage their fund in a way that will beat the overall growth of the market.
Many of the companies that fund managers look for to invest in for their growth fund are small companies that have room in their share price to grow. There are several ways that this might happen.
First of all, a small company might possess a patented technology or innovation that will disrupt their industry, and one that others will find it difficult to reproduce. An example of that back in the early days of the tech boom was Microsoft.
The other characteristic they are looking for are small companies that have the potential for extraordinary share price and market cap growth over time. In essence, fund managers that look for these types of deals are looking for the next Google of Microsoft, but while they are trading still at $5 per share.
These money managers also look for companies that have the potential to be acquired by another larger company. Some start up companies begin with the intention of being bought up by Google. But it doesn’t always have to be a deliberate intention. Fund managers of a growth mutual fund will also have an eye out for companies that will look attractive for a merger or hostile takeover. In fact, the best time to buy one of these companies is right before a merger or acquisition.
Then there are aggressive growth funds. These look for essentially penny stocks that are legitimate companies that have massive room to grow. It only takes one or two penny stocks to become a Google for it to be worth it.
Some funds are a hybrid of the two. They look at both value and try to achieve growth. There are others who attempt at achieving growth by investing in large cap stocks. Essentially they are looking for large companies that have the potential to beat the market.
Make sure you get investment advice from a registered financial advisor to identify your needs and explore your options. Virtually every asset management firm has a growth fund in their menu of products. Companies like Vanguard, BlackRock and Fidelity have many of these funds they offer to their clients. You can track their performance on Morningstar’s website.
These days you can find all kinds of growth funds. In fact, in addition to finding them as mutual funds, you can also find them as exchange traded funds, also known as ETF’s. You can also find them in passively managed funds index funds and save yourself quite a bit in management fees. A good place to start looking are in small cap funds. These are comprised of small companies that have room and potential for extraordinary growth.