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24 June 2024

Spotlight on: Growth Funds

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By FMA Editorial Team

It’s important to choose the right kind of fund for your KiwiSaver account. And if you’re just starting your career, then choosing a growth fund could mean hundreds of thousands of dollars more extra returns when it comes to retirement.  

In our ‘Spotlight’ series, we’re looking at the different kinds of KiwiSaver funds out there and exploring how they work.

Today we’re checking out GROWTH funds.

What is a growth fund ­— and who is it most suitable for?

Growth funds are generally best if you need higher growth in your investment over the long term, and you won’t panic and want to switch to a lower-risk fund if you see your account balance rise and fall – even by big amounts.

A growth investment is when fund managers buy a certain mix of higher-return, more volatile investments like shares and property, and fewer lower-risk investments with a typically lower, fixed return like bonds and cash.  The goal with a growth fund is higher returns over the long term.

The amount of time matters because if the value of your investments does drop in the short term, you have enough time in your investment horizon for your assets to recover again.

A growth fund is great if you’re OK with seeing your account value occasionally fall and you’re looking for long-term returns. 

If you don’t need to spend your KiwiSaver money in the next 10 years or longer, then a growth fund is usually best because you’ll have enough time to see it grow over the longer term.

FMA Director, Markets, Investors and Reporting, John Horner says picking a growth fund could mean a much better KiwiSaver balance when it comes time to retire. 

“A growth fund does come with higher risk than other types of funds, but it usually means better returns. If you understand that a higher return comes with more volatility – and you can handle seeing your balance drop occasionally, perhaps significantly, then a growth fund is the way to go. “

“But if you’re getting closer to retirement or buying that first home, it’s time to start thinking about a more conservative fund,” he said.  “If you’re young, have a long way until retirement, a growth fund is probably a better option for you.”

“But also check your fund type is good for your ability to handle ups and downs. If your balance drops and you find that really upsetting, you should probably think about a lower-risk fund. Even if a higher-risk one is better suited to your situation.”

 

Let's get technical

A more technical description of a growth fund looks at the mix of income and growth assets it contains.

A target investment mix might be 70% growth assets and 30% income assets. This ratio isn’t set in stone, growth funds will fall within a range of having 63% to 89.9% in growth assets. 

Income assets are things like bonds and cash, which pay a specified rate of return.  Growth means shares in companies (internationally and locally) along with property and other types of investing including infrastructure and private equity.  These are higher risk — but when they grow, they can grow big, with better returns. But the more growth assets you’ve got in your fund, the more volatile it will be.

Shares are higher risk and do promise higher returns, so you’ll find more of them in a growth fund than other, more conservative investments.  There’ll be a smaller slice taken up by things like bonds and cash.

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