Investors allocate funds to mutual fund investments for many reasons. Some investors do so for a steady source of income through investments, and many invest to avail capital appreciation and growth. Different mutual funds come with distinct features and benefits. One of the mutual fund types that is becoming popular among investors seeking capital appreciation and growth is the option of a Growth mutual fund. Every equity mutual fund has the option of growth or dividend. A growth fund invests in new but promising companies that show the potential to deliver extraordinary returns.
A growth mutual fund invests in avenues that show a higher potential of growth at a relatively faster pace. These investments generally involve a higher risk level. A growth mutual fund typically invests in equity or stocks that have higher growth potential. Here, we will uncover everything that an investor must know about growth funds before investing in one.
What is a Growth Fund?
A growth fund portfolio mainly comprises equity investments with an objective to achieve capital appreciation. It involves very little to no dividend payments. Growth funds invest in companies that have a proven track record of growth or companies that are relatively new but have higher growth prospects.
There is a high-risk, high-reward element involved in growth funds. Therefore, these are preferred by individuals who are not anywhere near their retirement period and can take far more risks. Investors must have a higher risk tolerance level and an investment time horizon of 5-10 years.
How do growth funds work
Here are some of the top features of growth funds that will help us understand how they work:
- Objective: Growth funds aim for long-term capital appreciation through investing in high-growth potential stocks.
- Equity Investments: These funds primarily invest in stocks of companies across sectors and market capitalizations.
- Portfolio Diversification: Growth funds maintain a diversified portfolio to reduce risk.
- Active Management: Professional fund managers actively make investment decisions based on research and analysis.
- Long-Term Horizon: Suitable for investors with a long investment horizon of five years or more.
- Dividends and Capital Gains: Some funds distribute dividends, and investors may realize capital gains when selling units.
- Risk and Volatility: Growth funds carry higher risk due to equity exposure and fluctuate with market conditions.
Types of growth funds
In India, growth funds are largely seen in multi-cap funds, which comprise of small and mid-cap stocks, paving a way to moderate risk. There are no distinct types of growth funds; however, they may be segregated on the basis of risk and volatility. Growth funds normally consist of high potential companies, and some of these companies might be ready to hatch, while some might require more time.
What are the benefits of investing in a growth mutual fund?
Some of the major benefits offered by growth mutual funds are as follows:
- Capital appreciation: Capital appreciation is the primary reason why many people get attracted to growth fund investments. With growth funds, there is a chance of achieving above-average growth in the long run. Many companies tend to be on a high growth trajectory in growing economies like India. Therefore, investors who are willing to take on higher risks can use such opportunities via growth funds.
- Diversification: Growth funds can benefit even cautious investors if they restrict the fund investment to a small percentage. With some growth funds in an investor’s portfolio, diversity can be added for maximising returns.
- Easy investment process: Mutual fund investments are easy, especially with new-age apps like Fisdom that offer seamless application and investment processes.
- Easy liquidity: Growth funds offer higher liquidity since they are primarily invested in equities, which have higher demand and supply compared to other asset classes.
What are the risks of investing in Growth Funds?
Here are some of the risks involved in growth fund investments that investors must consider:
- Impact of Market Volatility – Growth funds can be highly volatile because of the rise and fall in stock prices. Thus, an investor can be constantly exposed to the risk of losing the invested amount.
- Zero Dividends – Growth funds do not necessarily offer periodic dividends, bonuses, etc. Since these constitute stocks with very little or no dividend payouts, investors who are looking for a regular income source through dividends may not benefit from these investments.
- Investment Horizon – Investors who wish to benefit from a growth fund investment must be willing to stay invested for a time range of 5 to 10 years. Hence, for those looking for instant profits within a short period, a growth fund may not be an ideal investment choice.
Tax implications on Growth Funds
Earnings from growth funds are subject to capital gains tax. Short-term gains from growth funds are taxable at 15%, whereas long-term capital gains are taxable at 10%. Long-term capital gains tax is 10% in case the earnings exceed Rs. 1 lakh annually (spread across all equity related instruments) or the mutual fund units are held for more than a year.
How to choose the right growth fund
Choosing the right growth fund in India can be a daunting task. Here are some tips that can help you choose the right growth fund:
- Look for funds that have a good track record of performance over the long term.
- Consider the fund manager’s experience and track record.
- Look for funds that have a low expense ratio.
- Consider your investment goals and risk tolerance when choosing a fund.
- Diversify your portfolio by investing in multiple funds.
Who should invest in Growth Funds?
Listed here are some of the common characteristics of growth fund investors:
- Aggressive investors who are willing to take an additional risk for fast-paced returns
- Investors who have a long-term investment horizon
- Young investors who have substantial time until retirement
- Those with surplus money and are looking to grow their funds by remaining invested for a longer duration
When to invest in Growth Funds
Growth funds are ideal for investors who are willing to bear a moderately high amount of risk for high returns and who do not wish to get involved in the researching and selection of stocks. It is an ideal investment option for investors with medium-term investment horizons. Having a long-term investment horizon of 5-10 years is crucial to investing in these high growth stocks. Therefore, it is best suitable for long-term investments. If you have a high appetite for risks and seek a stock with high returns, then you may consider investing in these funds. However, if you are close to your retirement, then it would be prudent not to invest in these funds.
Growth funds are high-risk investments that are ideal for aggressive risk-takers who are willing to stay invested for 5-10 years. These may generate high yields depending on market conditions, fund manager’s expertise, etc. Those who are nearing retirement must ideally stay away from investing in these funds.
If an investor wants to exit the fund prematurely, heavy exit load fees may be applicable. Thus, the returns will comprise the sale value and surplus selling price as compared to purchase cost.
FAQs on Growth Funds
- How does a growth fund work?
A growth fund mainly invests in stocks with a primary objective of capital appreciation with little to no dividend payouts. The fund invests in companies that have shown above-average growth and those that reinvest earnings into expanding operations, acquisitions, research and development (R&D), etc.
- What is the difference between a growth fund and an equity fund?
Equity funds can provide steady returns in the long run whereas, growth funds have the potential to generate returns in the short run and long-term. Equity funds may invest in all kinds of stocks. Growth funds, however, pick stocks of those organisations that show a higher potential for growth in the short run.
- What is better growth or value funds?
Young investors can choose growth fund investments since it can provide higher chances of quicker capital appreciation as compared to value funds. Value funds invest in companies that are presently undervalued but have the potential of yielding higher dividends in the future. Value funds may not provide immediate returns, but investors can enjoy safety of their capital and earn good dividends.
- Are growth mutual funds good investments?
Growth mutual funds are typically known to outperform value funds, especially in the last stage of an economic cycle that is also known as the period before a recession sets in. These are a good investment option for those looking for short-term capital appreciation through investment in companies that have a high growth potential.
- How to invest in growth mutual funds?
Investors can easily invest in growth mutual funds through Fisdom app, since it allows a seamless and quick investment process. Within equity funds, investors can choose those that have the growth option to avail the benefits of growth mutual funds.