The higher the risk, the greater the profit or loss. In the financial world, this simple thumb rule is a proven example of how markets work. Each investor has a different risk appetite, and they reap the benefits in the same proportion.
While there is a myriad of investment instruments to choose from, growth funds take centre stage for high capital appreciation in the long term. They are mutual funds for financial growth that focus on investing in high-growth potential companies.
This article explains what growth funds are, their benefits, and why they are becoming a popular choice for investors' portfolios.
A growth fund is a kind of mutual fund that primarily invests in growth-oriented stocks or securities to achieve a high capital appreciation. Because of the high risk associated with these funds, they are managed by highly professional fund managers. These professionals meticulously choose a diverse portfolio of stocks with a high growth potential. Growth funds typically focus on innovative industries and sectors with tremendous potential for future expansion.
The growth fund meaning lies in its investment objective. It is simply to invest in companies that anticipate growth in their earnings and ultimately witness a boom in their stock prices over time.
Now that you know what is a growth mutual fund, the question arises: how is it different from other types of mutual funds? While both these funds pool money from multiple investors, the objective differentiates growth funds from other mutual funds. Growth funds aim to maximise returns over an extended period. On the other hand, regular mutual funds have a more balanced investment objective. They aim to strike a balance between capital appreciation and income generation.
- Investment in growth-oriented companies: Growth funds primarily invest in companies with a higher growth potential than the industry average.
- Diversification: Growth funds spread their investments across various sectors and industries to reduce risk. This helps mitigate the impact of downturns in any single sector.
- Active portfolio management: Fund managers of a growth fund actively monitor and adjust its holdings to capitalize on emerging opportunities and manage risks.
- Risk appetite: Growth funds typically experience greater volatility compared to conservative funds. Hence, they are more suitable for investors with a higher risk tolerance.
- Long-term investment: Investors in growth funds typically have a long-term investment horizon. This gives ample time for their money to grow as the companies expand and increase in value.- Focus on high-growth sectors: These funds often focus on sectors which are expected to experience rapid growth due to innovation, demographic shifts, or other market dynamics.
Growth funds work similarly to other mutual funds. They pool money from multiple investors into a diversified portfolio of stocks with high growth probability.
The fund manager conducts extensive research and analysis to identify companies with solid growth prospects. Such companies are typically from sectors such as technology, healthcare, consumer discretionary, and other industries at the forefront of innovation.
The main motive for investing in a variety of growth stocks is to diversify the risk involved in the investment. Moreover, growth funds are driven by a high hope that the chosen companies will boost the fund's performance and deliver excellent returns in the long term.
Growth funds in mutual funds have many benefits. These include:
The top advantage of growth funds is the potential for generating high returns. Investing in stocks with notable growth potential can generate substantial capital appreciation, outperforming the broader market in the long run.
Investors can diversify their investment through growth funds by investing in different growth-oriented companies. This diversification lowers the impact of poor performance by any individual stock and helps stabilise the overall stock portfolio.
Growth funds are managed by professional fund managers with expertise in research and analysis of growth opportunities. The knowledge and experience of these fund managers are valuable for investors who wish to invest in high-growth companies but lack the time or expertise to select individual stocks.
Growth funds are perfect for investors looking to invest for the long term. They focus on companies with strong growth potential, generating significant capital appreciation over an extended investment horizon.
Similar to other mutual funds, growth funds provide high liquidity. Investors can buy or sell units of their growth fund on any business day at the fund's net asset value (NAV).
Growth funds are highly accessible. You can invest in them through various platforms, including mutual fund houses, brokerage firms, and online investment platforms. You can also select the investment amount based on your goals and financial capacity.
Growth funds have the potential to generate high returns. However, with the anticipation of high returns comes the possibility of high risks like:
Growth funds are equity-focused and subject to market fluctuations. They can experience significant short-term volatility. Therefore, it is recommended to stay invested for a longer duration to ride short-term market fluctuations.
Unlike certain fixed-income investments, like fixed deposits or government bonds, growth funds do not offer guaranteed returns. The performance of these funds is directly related to the underlying stocks in the portfolio, which are subject to market fluctuations and uncertainties. As a result, while growth funds specifically focus on companies with high growth potential, there is no guarantee that these companies will consistently perform well.
Some growth funds come with relatively higher expense ratios because of the active management and research involved. So, make sure you verify the fees and expenses associated with the fund before investing in it.
The potential for a company’s growth may take several years to materialise fully. Therefore, only investors with a long-term investment horizon should invest in growth funds
Growth funds can be categorised into three broad categories depending on the market capitalisation of the companies in their portfolios. These are:
80% of the total corpus is invested in well-established large-cap companies that rank above 100 in market capitalisation.
At least 65% of the total corpus is invested in mid-cap companies that are still establishing themselves and have a better potential to grow faster.
65% of the total corpus is invested in small-cap companies with a higher potential to generate high returns than mid- and large-cap funds. However, these funds have higher risks associated with them.
Since growth funds can be more volatile than traditional funds, they are ideal for investors who are willing to take a higher risk for potentially higher returns. To invest in growth funds, you must have a long-term investment horizon, that enables you to ride out short-term market fluctuations and benefit from the potential compounding of returns over time as the companies in the fund grow.
Additionally, growth funds are also ideal for young investors as they can afford to take more risk early in their investment journey to potentially achieve higher returns over the long term. However, if you're risk-averse or nearing retirement, it's best to avoid growth funds and invest in safer securities.
The profits earned from a growth fund attract capital gains. If you sell the units of the fund within 12 months, you'll have to pay short-term capital gains tax. Short-term capital gains in India are taxed at 15% if your total profit exceeds Rs. 1 lakh in a year.
On the other hand, for profits on growth fund units sold after 12 months, you'll have to pay long-term capital gains tax. Long-term capital gains are taxed at 10% if your total profit exceeds Rs. 1 lakh in a year.
Irrespective of the risks associated with growth funds, they have gained massive popularity among investors seeking long-term capital appreciation and financial growth. However, it is always wise to consult a financial advisor to make well-informed investment decisions.
At Tata Capital, our experts help you select the best funds based on your financial goals and risk appetite. Visit the Tata Capital website or dowload our Mutual Fund App to embark on your journey toward financial growth and a secure future.
Yes, you can invest in growth funds with a small amount, starting with as little as Rs. 500 or Rs. 1,000 depending on the fund.
To select the right growth fund, you must consider various factors like your investment goals, risk tolerance, investment horizon, expense ratio, historical performance, fund manager's track record, and the fund's investment strategy.
Yes, growth funds carry risk. This means the value of your investment can fluctuate with market conditions. However, growth funds typically aim for long-term capital appreciation by investing in growth-oriented companies, which can potentially mitigate risks over time.
The three types of growth funds include:
- Large-cap growth funds
- Mid-cap growth funds
- Small-cap growth funds
Growth mutual funds can be suitable for investors seeking capital appreciation over the long term. They are particularly suitable for investors with a higher risk tolerance and a long-term investment horizon.
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01 August 2023
8 mins read
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