A performance fund is a type of mutual fund designed to achieve capital growth by investing in high-growth companies. These companies typically reinvest their earnings into their operations rather than paying substantial dividends, aiming to increase their market value over time.
Investment Strategy of Performance Funds
Performance funds focus on companies that are expected to exhibit significant growth, often in dynamic and rapidly evolving sectors like technology, biotechnology, and renewable energy. The fund managers select stocks of companies with higher growth potential based on fundamental analyses, industry trends, and market conditions.
Risk Considerations
Investing in performance funds comes with certain risks.
Market Volatility
Because these funds invest in fast-growing sectors, they can be more volatile than other types of mutual funds, leading to higher potential returns but also higher potential losses.
Lack of Dividends
Investors looking for regular income might not find performance funds suitable since they typically pay little to no dividends.
Historical Context
The concept of performance funds dates back to the post-World War II era, as economic growth spurred the creation of various new industries. Over the decades, performance funds have become popular among investors seeking capital appreciation and willing to tolerate higher risk for the potential of higher returns.
Practical Examples
Technology Sector
A technology-focused performance fund might invest in companies like Apple (AAPL), Microsoft (MSFT), and emerging Tech startups. Despite their varying stages of maturity, these companies reinvest heavily in innovation and growth.
Biotechnology Sector
Another example is a biotechnology performance fund, targeting companies involved in developing new medical treatments and technologies, such as Moderna (MRNA) or CRISPR Therapeutics (CRSP).
Applicability
Performance funds are suitable for investors with a higher risk tolerance and a preference for long-term capital gains over regular income. These funds are often integral to a diversified investment portfolio, complementing more stable, income-generating assets.
Comparisons
Versus Income Funds
Unlike income funds that invest in dividend-paying stocks and bonds to provide regular income, performance funds prioritize growth. As a result, their returns are more dependent on capital appreciation than on steady dividends.
Versus Index Funds
While index funds seek to replicate the performance of a market index, performance funds actively seek out companies with the highest growth potential, often leading to more active management and potentially higher fees.
Related Terms
- High-Growth Companies: Firms that are expected to grow their earnings at an above-average rate compared to other companies in the market.
- Capital Appreciation: Increase in the market value of an asset.
- Dividend: A portion of a company’s earnings distributed to shareholders.
- Volatility: The degree of variation in the price of a financial instrument over time.
FAQs
What are the potential returns from performance funds?
Are performance funds suitable for all investors?
How do performance funds select the companies they invest in?
References
- “Mutual Funds and Mutual Fund Investing - Fidelity Investments.” Fidelity.com. Accessed August 2024. Fidelity Investments
- “SEC.gov | Mutual Funds and Exchange-Traded Funds (ETFs) – A Guide for Investors.” SEC.gov, United States Securities and Exchange Commission. Accessed August 2024. SEC.gov
- “Understanding Mutual Funds: Types, Pros & Cons.” Investopedia. Accessed August 2024. Investopedia
Summary
Performance funds are mutual funds aimed at capital growth by investing in high-growth companies. Characterized by higher volatility and a focus on capital appreciation over dividends, they suit investors with higher risk tolerance and long-term investment horizons. Their success depends on the performance of chosen high-growth firms and the astuteness of fund managers in selecting promising investments.
