Growth funds are diversified portfolio with capital appreciation as its prime objective. It comprises of stocks with little or next to no dividend payouts. This portfolio is made up of companies that register above average growth, but reinvest the earnings for the purpose of research and development and acquisitions and expansions etc.
Growth funds, most of them, offer a potentially high capital appreciation at a risk that is considered above average. These funds along with blend and value funds form one of the main categories of mutual funds. They are split in the small, mid and large groupings of market capitalization.
Benefits of Investing in Growth Funds
Growth funds have a significant number of buyers for their several benefits, some of which are listed here.
Expert Management of your Money
One of the best parts of investing in a growth fund is the professional management of money service that comes with it. It is managed by a team of qualified professionals, tasked with identifying these growth stocks for the investors. The buying and selling decisions pertaining to the stocks are also left in the expert hands of the managers. It leaves your role to be limited to a passive investor.
A Diversified Portfolio
Growth funds also offer a certain level of diversification though a lot of investors are mainly attracted to this fund for its potential for growth. Having a mix of growth stocks in a mutual fund helps with diversification and therefore, to a certain extent reduces the overall risk of investing in these volatile stocks.
Appreciation in Capital
Growth funds are popular amongst investors for their capital appreciation properties. Professional money managers spend a considerable amount of effort in identifying and picking out these stocks. It is particularly sought out by the younger investors with the benefit of long-term investment at hand.
Growth funds are known to be more tax-efficient as compared to value stock mutual funds.
As an investor, it is crucial for you to know that growth funds are for people with more risk tolerance. However, in the long run growth funds have the potential to grow substantially.
One major drawback of growth funds is that they are extremely volatile with the stocks experiencing a sudden rise and drop. Therefore, it is best suited for you if you are a highly risk tolerant investor.
If you want to really benefit from a growth fund, you will have to be ready to commit to the fund for a period of 5 to 10 years. It is not for those seeking to make a quick profit in a short time period.
These funds require a management charge and therefore will cost you more in terms of your expense ratio. A part of your profit will be used in paying off the fees every year as well.
Minuses to watch out for
- The downfall of growth fund is that you are left exposed to the risk of losing the entire investment amount.
- These funds are also prone to decline in value and are of a highly volatile nature.
- Growth funds may not deliver regular returns in the form of dividends, bonus, interest, bonus, etc.
Who is it more Suitable for?
Growth funds are high-risk investment instruments and are not suited for you if you hope to retire soon.
You can opt for these if you are risk tolerant and are willing to hold on to a period of five to 10 years. Quick exit is not a sensible option. The only returns will be from selling the funds and your profit will be the surplus selling price over the purchase price.
If you think this suits your investment persona, go ahead and invest in growth funds.