Definition
A Performance Fund is a category of mutual fund dedicated to generating significant capital appreciation by investing in companies that are projected to experience strong growth. These funds primarily target high-growth companies that reinvest profits back into the company rather than paying out substantial dividends.
Detailed Explanation
Performance funds are suitable for investors with a higher risk tolerance who aim for substantial returns over a mid- to long-term period. Managers of performance funds select companies with innovative technologies, strong market positions, and robust growth prospects. Since these companies often pay small dividends or none at all, the returns from performance funds come mainly from capital gains.
Key Characteristics:
- Growth-Oriented: Focus on companies with strong future growth potential.
- Low Dividend Yield: Invest in companies that prefer to reinvest earnings into expansion rather than distributing dividends.
- Higher Risk: Subject to higher volatility compared to income-oriented funds.
- Long-Term Focus: Generally appropriate for long-term investors who can withstand short-term price fluctuations.
Examples
- Tech-focused Performance Funds: Investing in emerging technology companies like those in artificial intelligence (AI), cloud computing, and biotechnology sectors.
- Small-Cap Growth Funds: Targeting small companies with substantial growth prospects in niche markets.
- International Performance Funds: Investing in high-growth companies located outside the investor’s home country, often in developing or emerging markets.
Frequently Asked Questions (FAQs)
Q1: Who should invest in performance funds? A1: Investors who have a higher risk tolerance and are seeking substantial long-term capital growth rather than regular income should consider performance funds.
Q2: What are the risks associated with performance funds? A2: Performance funds typically carry higher risk and volatility because they invest in high-growth companies, which may have variable or no earnings and are more sensitive to market fluctuations.
Q3: How do performance funds differ from income funds? A3: Performance funds focus on capital appreciation and invest in companies that offer little to no dividends, whereas income funds prioritize regular income and typically invest in dividend-paying stocks or bonds.
Q4: Can performance funds provide regular income? A4: No, performance funds usually do not provide regular income as they invest in companies that reinvest their earnings for growth rather than paying dividends.
Q5: What is the typical investment horizon for performance funds? A5: The investment horizon for performance funds is generally long-term, often five years or more, to weather the volatility and benefit from potential high growth.
Related Terms
- Capital Appreciation: Increase in the market value of an asset or investment over time.
- High-Growth Companies: Companies that are expected to grow their revenues and earnings at an above-average rate compared to other firms.
- Dividends: A portion of a company’s earnings distributed to shareholders.
- Volatility: The degree of variation in the trading price of an asset over a period.
- Mutual Fund: An investment vehicle that pools money from many investors to purchase a diversified portfolio of securities.
- Small-Cap Stock: Stocks of smaller companies typically with a market capitalization between $300 million and $2 billion.
Online Resources
Suggested Books for Further Studies
- “The Bogleheads’ Guide to Investing” by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf
- “Common Sense on Mutual Funds” by John C. Bogle
- “A Random Walk Down Wall Street” by Burton G. Malkiel
- “The Intelligent Investor” by Benjamin Graham
Fundamentals of Performance Funds: Mutual Funds Basics Quiz
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