What are Growth Funds ?
Growth Funds are usually those equity mutual funds which invest in the stocks of high growth companies. These companies offer an opportunity to gain capital appreciation over the long term. Usually, these companies trade at high valuations in the market with high P/E & P/B ratios backed with strong revenue & sales growth in previous years.
The high growth stocks carry the potential to generate extraordinary returns over time, but at the same time risks are also higher in these companies. That’s why investments in growth funds are recommended for long term investors with a moderately high-risk appetite.
The growth funds are available in equity mutual fund categories like Largecap, Midcap & Smallcap based on market capitalization. These funds build a portfolio of high growth stocks which makes little or no dividend payouts and reinvests earnings into their business for generating more income & returns.
Benefits of Growth Funds
Growth funds aim to invest in companies experiencing high growth and therefore generate higher returns for investors over the period. Let’s explore some of the benefits of investing in growth funds:
Diversification
Having growth funds in the portfolio can provide good diversification. A diversified portfolio can generate good returns along with reduced overall risks.
Higher Returns
The growth funds can generate potentially higher returns for investors compared to other funds as India is a growing economy and there are a lot of businesses growing at a very rapid pace. Investments in such high growth companies can offer a good capital appreciation over the long term.
Professional management
A lot of research needs to be done for picking quality growth stocks to build a portfolio. Mutual funds offer the benefit of professional management who actively look for quality growth stocks and aim to generate good returns for investors.
Taxation
As growth funds usually make equity investments, they attract the taxation of equity mutual funds. Following is the taxation applicable to growth funds:
- If units are sold within 1 year, then gains on investments are treated as Short Term Capital Gains which are taxed at the rate of 15%.
- If units are sold after 1 year, then gains on investments are treated as Long Term Capital Gains. LTCGs are taxed at the rate of 10% on gains exceeding Rs.1 lakh in a financial year.
Ideal for Long-term Investments
Growth funds are an apt choice for long term investments. These funds can offer potentially higher returns over a long period along with lower volatility.
However, the volatility can be higher over short periods, and therefore, they are not recommended for investors with a short investment horizon.
Who Should Invest in Growth Funds ?
Investors having a moderate to high-risk appetite along with a long investment horizon of at least 5 years can consider investments in growth funds. They might not be suitable for investors who are nearing their retirement or need money after a short period of time.
Also, investors who already have a stable portfolio built-up of low volatile investments and want to give a boost to their portfolio can consider investments in growth funds.
How to choose the right Growth Fund ?
Consider the following parameters to choose the right Growth Funds-
Risk Appetite
It is very important to determine your risk profile before making investments in growth funds. Generally, these funds across equity categories can be suitable for investors with moderate to high-risk appetite. However, if you have a low-risk profile then it would be better to consider good debt mutual funds offering more stable returns.
Investment Horizon
Investors should also consider their investment horizon before making any investment decisions in growth funds. As it is recommended to hold these funds for a long horizon to reap the benefits of higher returns from underlying equity investments.
Fund Manager
The fund manager or AMC managing the fund can also be considered as the ones with a consistent performance track record are expected to deliver good performance. Also, one can determine the investing style of a manager from his previously or currently managed funds.
Portfolio
Investors can also look at the portfolio of different funds in the mutual fund category they are willing to invest. The ones having underlying high-quality stocks could be a good pick for a long term investment.
Expense Ratio
One can look at the expense ratio of different funds to know about their costs. However, it doesn’t mean that the funds with a low expense ratio should be preferred as there can be funds charging more for their consistent performance & high returns.
Take help from a financial advisor
For selecting the best growth funds or any other mutual funds, it is always best to consult a financial advisor who can suggest funds after considering your risk appetite, investment horizon & other requirements.
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