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Baron Funds

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Baron

Baron Growth Fund Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectus contains this and other information about the Funds. You may obtain them from its distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing. The Adviser believes that there is more potential for capital appreciation in smaller companies, but there also may be more risk. Specific risks associated with investing in smaller companies include that the securities may be thinly traded and they may be more difficult to sell during market downturns. The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk. The discussions of the companies herein are not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed in this report reflect those of the respective portfolio managers only through the end of the period stated in this report. The portfolio manager’s views are not intended as recommendations or investment advice to any person reading this report and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Growth Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. Alpha: measures the difference between a fund’s actual returns and its expected performance, given its level of risk as measured by beta. Beta: measures a fund’s sensitivity to market movements. The beta of the market (Russell 2000 Growth Index) is 1.00 by definition. P/E: the price earnings ratio is a valuation ratio of a company’s current stock price to its actual earnings per share. 28

December 31, 2016 Baron Small Cap Fund Dear Baron Small Cap Fund Shareholder: Performance Baron Small Cap Fund (the “Fund”) gained 1.38% (Institutional Shares) in the fourth quarter of 2016. For the year the Fund was up 10.26%. The Fund trailed the Russell 2000 Growth Index and the S&P 500 Index for the quarter (up 3.57% and 3.82%, respectively) and was mostly equal for the year. Table I. Performance Annualized for periods ended December 31, 2016 Baron Small Cap Fund Retail Shares 1,2 Baron Small Cap Fund Institutional Shares 1,2,3 Russell 2000 Growth Index 1 S&P 500 Index 1 Three Months 4 1.31% 1.38% 3.57% 3.82% One Year 9.94% 10.26% 11.32% 11.96% Three Years 1.94% 2.21% 5.05% 8.87% Five Years 11.48% 11.77% 13.74% 14.66% Ten Years 6.57% 6.77% 7.76% 6.95% Since Inception (September 30, 1997) 9.23% 9.34% 5.42% 6.55% CLIFF GREENBERG PORTFOLIO MANAGER Retail Shares: BSCFX Institutional Shares: BSFIX R6 Shares: BSCUX The election of Donald Trump raised investor hopes for better economic performance and the market has risen to new highs. The potential for tax cuts (business and personal), targeted increases in fiscal spending, and looser business regulation are pro-growth and would bolster corporate profits, which drives stock over the long term. The election of Trump was unexpected, as was the markets’ reaction to his victory, which comes from a newfound optimism about growth after an extended period of sluggishness, resulting in higher trading multiples and optimism for business prospects. The leadership in the market shifted. Coming into the election, economically sensitive stocks were weak over concerns of a noticeable pre-election pause in the pace of growth. That outlook, however, was flipped on its head postelection. Financials acted best, as those businesses benefit from higher interest rates. Industrials, Materials and Energy sectors rose as presumed beneficiaries of faster growth. And Consumer Discretionary stocks were back in vogue on the hopes that lower taxes would increase spending. Some of the winners from earlier in the year–Health Care, Information Technology (IT) and Consumer Staples–underperformed either because of concerns that the new administration would be less friendly to these industries or because stocks were a source of funds as the market rotated. Table II. Top contributors to performance for the quarter ended December 31, 2016 Percent Impact Gartner, Inc. 0.69% On Assignment, Inc. 0.52 Cognex Corp. 0.42 Summit Materials, Inc. 0.41 INC Research Holdings, Inc. 0.32 Our best performing stocks during the quarter were a mix of companies that either reported strong results and positive corporate developments or benefited from the new market outlook post-election. Gartner, Inc., the leading provider of IT research, reported strong financial results for the third quarter and raised guidance. Revenues grew 13% on a constant currency basis and contract value (a forward looking indicator) accelerated somewhat, pointing to a bright future. The stock was weak earlier in the year on soft sales trends, which have reversed. Performance listed in the above table is net of annual operating expenses. Annual expense ratio for the Retail Shares and Institutional Shares as of September 30, 2016 was 1.32% and 1.06%, respectively. The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost. The Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted. For performance information current to the most recent month end, visit www.BaronFunds.com or call 1-800-99BARON. 1 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 the Fund are with dividends, which positively impact the performance results. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark of Russell Investment Group. 2 The performance data in the table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares. 3 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. 4 Not annualized. 29

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