Growth stock mutual funds are those that focus mainly on value appreciation rather than dividend payout. These mutual funds invest in young companies with high growth potential. Instead of paying dividends, growth firms reinvest that money for further growth. Investors are rewarded with increases in the price of the fund.

In general, growth mutual funds involve a higher level of risk than other mutual funds. That is why it is vital to have a clearly understand of what a growth stock mutual fund is and which one(s) to choose.

You may be reading this article because you’ve heard Dave Ramsey rave about “growth stock mutual funds.” He kind of coined that phrase. According to Dave Ramsey, these are the 4 main criteria which characterize a good growth stock mutual fund:

Diversification

Growth mutual funds generally invest in several different stocks which means investor’s portfolio is diversified. This balanced distribution across various sectors is important since it makes the price of the growth mutual funds less volatile by adding a layer of safety.

Fund Management

In the case of growth stock mutual funds, fund managers have an active role to play. They continually evaluate and alter the stocks held by the fund. So, managers with at least 5 to 10 years of experience in the industry are preferred. Though, if a new manager is showing big gains, it’s still okay to hold a relatively small amount of your portfolio in that fund.

Return

Investing in growth stock mutual fund implies holding the money long term, usually for decades. So it is advisable to judge the long term rate of returns of the fund before choosing. Only those funds should be chosen which perform consistently.

Cost

Since growth stock mutual funds involve lot of management activity, associated expenses are generally higher. People are more expensive than following an index. Even though, a fund with more than a 1% expense ratio is unnecessarily high. Avoiding high mutual fund fees will allow you to retire much, much earlier.