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Baron Funds

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Letter from Linda For

Letter from Linda For nearly eight years we have been through one of the strongest bull markets in history. As a result, passive has attracted a lot of attention – and assets. We believe that many investors who are switching from active to passive are victims of biases. Some are swayed by recent performance, some are just doing what others do, some are trying to time the market. Perhaps, because they face so many options, investors choose a simple solution – passive. Although passive offers certainty, you pay a big price. What you get is mediocrity: average returns. Disciplined and patient long-term active managers like Baron can capitalize on market inefficiencies and balance investor irrationality to achieve exceptional results. Those who try to time market swings or make quick profits eventually make the same mistakes, in our opinion, as Newton, the Dutch tulip people, and the dot com investors. Plus the millions of others who buy high and sell low. Don’t make that mistake. Be patient. Exceptional takes time. Sincerely, Linda S. Martinson Chairman, President, and COO The discussion of market trends and companies are not intended as advice to any person regarding the advisability of investing in any particular security. Some of our comments are based on current management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change any time based on market and other conditions, and we have no obligation to update them. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing. Definitions (provided by BAMCO, Inc.): The Russell 2000 ® Growth Index is an unmanaged index that measures the performance of small-sized U.S. companies that are classified as growth. The Russell Midcap ® Growth Index is an unmanaged index of those Russell Midcap medium-sized companies that are classified as growth companies. The Average Investor is represented by the Morningstar ® Investor Return. The Morningstar ® Investor Return (also known as dollar-weighted return) measures how the average investor fared in a fund over a period of time. Investor return incorporates the impact of cash inflows and outflows from purchases and sales and the growth in fund assets. In contrast to total returns, investor returns account for all cash flows into and out of the fund to measure how the average investor performed over time. Investor return is calculated in a similar manner as internal rate of return. Investor return measures the compound growth rate in the value of all dollars invested in the fund over the evaluation period. Investor return is the growth rate that will link the beginning total net assets plus all intermediate cash flows to the ending total net assets. The Average Fund is represented by Morningstar’s category average returns for Morningstar US OE Small Growth, Morningstar US OE Small Blend, Morningstar US OE Small Value, Morningstar US OE Mid-Cap Growth, Morningstar US OE Mid-Cap Blend, Morningstar US OE Mid-Cap Value, Morningstar US OE Large Growth, Morningstar US OE Large Blend and Morningstar US OE Large Value. Morningstar’s category average returns are not weighted and represent the straight average of annualized returns of each of the funds in the Categories. Morningstar classifies funds as being large-cap, mid-cap, or small-cap based on the market capitalization of the fund’s stock holdings; and as value, blend, or growth based on the value-growth orientation of the stock holdings. The nine possible combinations of these characteristics correspond to the nine squares of the Morningstar Style Box – size is displayed along the vertical axis and style is displayed along the horizontal axis. © 2017 Morningstar, Inc. All Rights Reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. 12

Baron Asset Fund Baron Funds Performance Comparison of the change in value of $10,000 investment in Baron Asset Fund (Institutional Shares) † in relation to the Russell Midcap Growth Index and the S&P 500 Index $240,000 $220,000 $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 6/12/87 9/87 9/89 9/91 9/93 9/95 9/97 9/99 9/01 9/03 9/05 9/07 9/09 9/11 9/13 9/15 12/16 Baron Asset Fund 1,4 Russell Midcap Growth Index 1 S&P 500 Index 1 Baron Asset Fund’s annualized returns as of December 31, 2016: 1-year, 6.51%; 3-year, 5.42%; 5-year, 13.53%; 10-year, 6.75%; and Since Inception, 11.05%. Baron Growth Fund $221,257 $152,033 $144,299 Comparison of the change in value of $10,000 investment in Baron Growth Fund (Institutional Shares) † in relation to the Russell 2000 Growth Index and the S&P 500 Index $140,000 $120,000 $100,000 $135,014 $80,000 $60,000 $40,000 $74,320 $49,558 $20,000 $0 12/31/94 9/95 9/97 9/99 9/01 9/03 9/05 9/07 9/09 9/11 9/13 9/15 12/16 Baron Growth Fund 2,4 Russell 2000 Growth Index 2 S&P 500 Index 2 Baron Growth Fund’s annualized returns as of December 31, 2016: 1-year, 6.31%; 3-year, 2.20%; 5-year, 11.56%; 10-year, 6.63%; and Since Inception, 12.56%. Baron Small Cap Fund Comparison of the change in value of $10,000 investment in Baron Small Cap Fund (Institutional Shares) † in relation to the Russell 2000 Growth Index and the S&P 500 Index $60,000 $50,000 $55,813 $40,000 $30,000 $33,889 $27,628 $20,000 $10,000 $0 9/30/97 9/99 9/01 9/03 9/05 9/07 9/09 9/11 9/13 9/15 12/16 Baron Small Cap Fund 3,4 Russell 2000 Growth Index 3 S&P 500 Index 3 Baron Small Cap Fund’s annualized returns as of December 31, 2016: 1-year, 10.26%; 3-year, 2.21%; 5-year, 11.77%; 10-year, 6.77%; and Since Inception, 9.34%. 1 The indexes are unmanaged. The Russell Midcap ® Growth Index measures the performance of medium-sized U.S. companies that are classified as growth and the S&P 500 Index of 500 widely held large cap U.S. companies. The indexes and Baron Asset Fund are with dividends, which positively impact the performance results. 2 The indexes are unmanaged. The Russell 2000 ® Growth Index measures the performance of small-sized U.S. companies that are classified as growth and the S&P 500 Index of 500 widely held large cap U.S. companies. The indexes and Baron Growth Fund are with dividends, which positively impact the performance results. 3 The indexes are unmanaged. The Russell 2000 ® Growth Index measures the performance of small-sized U.S. companies that are classified as growth and the S&P 500 Index of 500 widely held large cap U.S. companies. The indexes and Baron Small Cap Fund are with dividends, which positively impact the performance results. 4 Past performance is not predictive of future performance. The performance data does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemptions of Fund shares. † Performance for the Institutional Shares prior to May 29, 2009 is based on the performance of the Retail Shares, which have a distribution fee. The Institutional Shares do not have a distribution fee. If the annual returns for the Institutional Shares prior to May 29, 2009 did not reflect this fee, the returns would be higher. 13

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