Growth funds are one of the most popular types of investment funds, but the term can sound a bit vague until you break it down.
What is a growth fund?
In simple terms, a growth fund is an investment fund that aims to grow your money over the long term by investing in companies expected to expand faster than average.
These might be businesses launching new products, entering fresh markets, or simply riding strong long‑term trends such as technology, healthcare innovation or sustainability. Or they might be companies of any sector that are expanding through fresh organic growth or consolidation.
What tends to unite growth businesses is that they mostly reinvest profits to keep expanding, rather than pay out hefty dividends.
How do growth funds achieve their objectives?
Growth funds typically invest in:
Fast‑growing companies
These are firms that are expanding quickly – usually small, though sometimes already global giants – but all with one thing in common: they’re aiming to get bigger.
Industries shaping the future
Growth funds often tilt towards areas that are expected to innovate and become more important over time. Examples include automation, biotech, green energy, AI, cybersecurity, and digital payments. Most growth funds are not tied down to any particular theme and will invest across many of these areas to find companies that feed their growth appetite.
Companies with growth potential
Growth companies will often trade “expensively” compared to the wider market because investors are willing to pay more for future potential. More conservative growth funds typically look for businesses with a track record of strong revenues, rising market share, and competitive advantages – not just technological developments or hype around a particular theme or sector.
So, while “growth” might sound like chasing exciting new names, many fund managers are disciplined about spotting companies with real potential at acceptable valuations. Their style can sometimes be referred to as ‘GARP’ investing as they search for “growth at a reasonable price.” Global growth funds can therefore be very broad, and some will stick only to larger, blue-chip companies, which tends to temper risk.
What makes growth funds different from other funds?
Very broadly, funds investing in share markets tend to fall into two main camps: growth and income. Income funds focus on companies that pay out steady, reliable dividends. They’re a bit like buying a rental property where the appeal is a reliable regular income. Growth funds, on the other hand, are more like buying a property that isn’t fully developed yet but has the potential to rise in value significantly over time once it’s finished. Instead of prioritising dividends, they concentrate on companies that mostly reinvest any profits back into the business to fuel expansion.
There’s also funds that sit in the middle with managers looking for a combination of growth and income – in other words, to maximise ‘total return’. Then there’s funds that take a ‘value’ approach, looking to buy shares in a business for less than an objective view of the sum of its parts (either in hard asset value or what areas of the business are worth based on future profits).
All these approaches have their place in a diverse portfolio, but growth funds are typically designed for investors who are more interested in overall capital appreciation than income payments. There’s also funds that simply follow a broad index, known as trackers, that aren’t skewed to an investment style. Although, there are also more specialist index funds – sometimes called thematic funds – focused on certain themes or sectors such as technology or biotech. They would generally be categorised in the growth bucket too.
It’s also worth noting that some growth funds, especially those targeting specialised sectors, can experience more ups and downs than funds focused on steadier, dividend-paying businesses. This makes them typically more sensitive to shifts in market sentiment, simply because they’re backing companies where future potential plays a big role in valuation.
Why do investors choose growth funds for their portfolios?
Despite the occasional volatility, growth funds, exchange-traded funds (ETFs), and investment trusts remain a favourite starting point for UK investors – and for good reason. One of the biggest attractions is their potential for higher long‑term returns. Companies that surprise the markets by growing quickly can deliver impressive share price gains over time, and when those gains compound year after year, they can make a meaningful difference to long-term wealth building.
Another appealing feature is the access they provide to innovative, fast-evolving industries. Even if you’re not an expert on the likes of artificial intelligence, biotechnology or digital payments, a specialist growth fund invests in companies driving these trends on your behalf. Instead of trying to pick individual high‑growth stocks yourself – which can be challenging and risky – you benefit from a professional management team. They do the heavy lifting, analysing companies, assessing opportunities and making investment decisions to build a diverse portfolio of businesses that meet their criteria.
Growth funds can also align well with long-term investment goals. They often fit naturally into ISAs and SIPP investment strategies because time, as well as regular investing along the way, can smooth out the sometimes-significant short-term bumps.
What are the risks?
Like all investments, growth funds come with risks – and it’s important to understand them by reading the fund documentation such as the Key Investor Information Document (KIID). The most noticeable risk is higher volatility, especially for more specialist funds or those that run concentrated portfolios containing fewer components. Companies that have the potential to expand quickly but with an uncertain trajectory can see their share prices move more sharply than those of more mature, dividend‑paying firms. This means you may experience steeper rises, but also sharper falls.
Growth investing also moves in cycles. Sectors that are fashionable one year can fall out of favour the next – biotech and alternative energy being good examples. Part of the reason for this is because growth stocks can be very susceptible to changes in interest rates. Because their value lies in future potential, this is often seen as higher risk. If interest rates rise and safer investments like bonds offer higher returns, that can reduce how much investors are willing to pay for businesses with audacious or even overzealous growth plans.
Patience really is essential. These characteristics mean growth funds are not suited to investors with short time horizons, or perhaps even medium-term ones. If you may need your money within a few years, the natural peaks and troughs of growth investing won’t be appropriate. But for long-term investors who can look through the noise, the potential rewards of using them in a diversified portfolio can outweigh the periodic wobbles.
Two growth fund ideas
For more adventurous investors, here are two growth investments featured on our Preferred List of fund ideas for new investment across the major sectors.
As always, diversification by sector, geography and type of asset is essential to help reduce risk and ensure you are not overly reliant on one area or on certain circumstances. Each of these funds should be considered long term investments meaning five years plus. They are provided for your information but are not a guide to how you should invest.
Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus to ensure they meet with your objectives and risk appetite. The value of investments, and any income derived from them, can fall as well as rise and may be affected by exchange rate variations. Investors may get back less than invested.
Scottish Mortgage
For those whose investment horizon is measured in decades rather than years, and who can stomach significant short-term volatility, it makes sense to invest in some of the world’s exciting, innovative companies as part of a diversified portfolio. If that’s the case, the approach of Scottish Mortgage investment trust could appeal.
The managers have an unwavering focus on businesses capable of harnessing the power of technological change, creating new markets or disrupting existing ones, and in doing so provide substantial growth opportunities. The Trust invests in private companies as well as those listed on global stock markets, which currently offers hard-to-reach opportunities such as SpaceX and TikTok owner Bytedance.
A key part of the managers’ process is to understand emerging technologies before they reach public markets and wider recognition by speaking to businesspeople, entrepreneurs, and academics. This farsighted approach saw the Trust back many winners among the global internet giants at an early stage such as Google, Meta, and Amazon, though past performance is not a guide to the future and the Trust has experienced very sharp declines at times as well as rises.
Part of the reason for this extra volatility is there is gearing (borrowing to invest), which serves to exacerbate the price movements of an already-adventurous portfolio. We therefore believe Scottish Mortgage should usually be considered as a higher-risk satellite option for exposure to global markets rather than a larger core holding.
Gresham House UK Smaller Companies
Smaller companies are widely considered cheap at the moment, even within the context of an inexpensive UK market, despite frequently being able to maintain their strong growth potential regardless of the economic backdrop. And with corporate and private equity buyers sniffing around, there may also be opportunities to benefit from share price uplifts resulting from mergers and acquisition activity alongside the underlying growth on offer.
One fund option that could harness this long-term potential is WS Gresham House UK Smaller Companies, managed by experienced investors in both market-listed companies and private businesses. This crossover means the managers apply a private equity perspective to public markets, focusing on high-quality companies with strong management, market positioning and business models.
Be aware it tends to be a more volatile option within the sector as the concentrated approach of investing in just 40 to 50 holdings means each position has a meaningful impact on returns – so the managers’ stock selection is all-important. Small caps are typically riskier and less diversified than larger businesses too, so it’s best used as a smaller holding in a broad fund portfolio.
Looking for more investment ideas?
Our Preferred List highlights what our Collectives Research Team considers to be good quality investment options across the major investment areas. It includes a range of funds, investment trusts and ETFs.
The list:
- Helps provide ideas for retail investors happy to build and manage their own investment portfolios.
- Includes actively managed funds and investment trusts, as well as passive / index tracker funds.
- Shouldn’t be viewed as a personal recommendation to buy. The removal of a fund from the list should not be viewed as a suggestion or recommendation to sell holdings.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Get help with investment ideas
Our Preferred List represents best-in-class fund ideas from our specialist research teams for different asset classes, sectors, and higher risk specialist investment themes. Simply filter by investment type or sector, and even find options for responsible investing.
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