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The Many Flavors of Mid-Cap Growth Funds

Know how these funds invest before making your choice.

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You may be wondering why a Morningstar analyst would write that it's important to understand how a fund in the mid-cap growth category invests money. It's simple: The fund buys mid-cap growth stocks, right?

Well, yes and no. Consider two facts that complicate the picture. 1) When Morningstar fund analysts talk to managers who run mid-growth funds, we quite often hear: "I'm not sure why Morningstar puts my fund in the mid-cap growth category." 2) Maybe more strikingly, the average mid-cap growth category member currently devotes only 39% of assets to stocks that reside in the mid-cap growth section of the Morningstar style box.

There's plenty of misunderstanding about Morningstar's style-based categories for stock funds. An important point to remember is that we don't "put" funds into categories so much as they "fall" there. A fund's categorization is based on objective fundamental data, namely its underlying holdings. Diversified domestic-equity funds are assigned to one of the nine style-box categories based on the 36-month trailing average of the fund's style box history. Obviously, if a fund has consistently fallen into the large-blend corner of the style box for three years, it will go into the large-blend category. If a fund's style box has shifted once or more, it will be assigned to the category where it has spent the most time.

Todd Trubey has a position in the following securities mentioned above: BUFMX. Find out about Morningstar’s editorial policies.