1. Growth funds
A mutual fund that invests in growth stocks (an emerging company) to attain maximum capital appreciation is a growth mutual fund. This is why they seek out companies with a proven track record of great revenue growth or younger companies with potential. On the flip side, the risk is also on the higher side. These funds, along with blend and value funds, form one of the main categories of equity mutual funds. They are split in the small, mid and large groupings of market capitalisation.
A growth fund portfolio is made up of companies that register fast-paced progress and can deliver higher returns to investors. They, then, reinvest the earnings for research and development, acquisitions and expansions. As it comprises of stocks with little or next to no dividend payouts, companies that pay out dividends are of little interest to a growth fund manager. However, when the market falls, it can hit the investors badly just as it can reap significant capital gains when the market is high!
2. Who should invest in growth funds?
Growth funds are high-risk investment instruments. Therefore, you must consider investing in growth funds only if you are an aggressive risk seeker. For this reason, it has the potential to deliver high returns. If you are close to your retirement, then it would be prudent to not invest in these funds. It is best suitable for long-term investments. Hence, opt for these only if you are risk-tolerant and are willing to invest for at least 5 to 10 years.
Even though you can exit the fund early, it comes with an exit load. 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. Therefore, younger investors who have a long-term investment at hand find them particularly appealing.
3. Features & benefits of growth funds
a. Potential for high returns
This fund attracts a lot of investors due to its potential for capital appreciation. Professional fund managers spend a considerable amount of effort in identifying and picking out these stocks.
b. Risk factors
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.
c. Stock volatility
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 highly risk-tolerant investors.
Growth funds attract long-term capital gains tax or LTCG tax at 10% if the earning is above Rs 1 lakh and held more than a year. Nevertheless, they are more tax-efficient than that of value stock mutual funds.
e. Additional expenses
These funds require a management charge and therefore, will cost you more in terms of your expense ratio. The AMC will use a part of your profit to pay off the fees every year as well.
f. Expert money management
A team of qualified professionals, who identify growth stocks for the investors, manages a growth fund. The buying and selling decisions of the stocks belie in the expert hands of the fund managers. Hence, it leaves your role to be limited to that of a passive investor.
g. Diversified portfolio
Having a mix of growth stocks in a mutual fund helps with diversification. Therefore, it reduces the overall risk of investing in volatile stocks to a certain extent.
4. How to invest in growth funds
You can either invest directly with the AMC or via an intermediary. For a direct plan, you need to have some awareness about the market to make an informed decision. Regular plans are for less market savvy. Investing with ClearTax Invest comes with a host of benefits. We present you only the handpicked growth funds from the top fund houses in the country, after in-depth research. You only have to do your KYC formalities once, and the entire investment process takes no more than 7 minutes.
5. Disadvantages of growth funds
a. High market risks
The downfall of growth fund is that you are left exposed to the risk of losing a significant portion of your invested amount when the markets go downwards.
b. Possible value depreciation
These funds are also prone to decline in value and are highly volatile. The value of the stocks can fall or rise as per the market demand.
c. No dividends
Growth funds may not deliver regular returns in the form of dividends, bonus, interest, bonus, and so on.
d. Long-term commitment
If you want to benefit from a growth fund, then you will have to be ready to commit to the fund for a period of 5 years to 10 years. Therefore, a growth fund is not for those seeking to make a quick profit in a short period.
If the above information meets your investment goals and risk profile, you can invest in growth funds for long-term capital appreciation. Start investing now!