Growth Mutual Funds: Meaning, types and Benefits

In the world of mutual funds, growth funds stand out as a potentially suitable investment option for investors seeking capital appreciation over the long term. These funds aim to invest in companies with high growth potential, offering the possibility of significant returns over an extended horizon.

This article explores the various advantages and disadvantages of growth funds. We also discuss the strategies associated with growth funds that are essential for investors looking to build a diversified portfolio aligned with their financial goals.

• Table of contents

1. What is growth mutual funds?
2. How does growth mutual funds work?
3. What are the types of growth funds in India
4. Advantages of investing in growth funds
5. Disadvantages of investing in growth funds

What is growth mutual fund?

A growth fund represents an equity mutual fund designed to optimize the potential for capital appreciation for investors. These funds concentrate on companies demonstrating exceptional revenue growth and promising long-term prospects.

Typically favoring companies in their early stages of development with strong growth potential over the coming years, Growth funds cater to investors willing to tolerate relatively higher risk and commit to long-term investments spanning five to ten years.

It's essential to note that investing in growth funds entails a long-term commitment, and premature withdrawals may incur exit load costs. However, for investors with diversified portfolios seeking higher returns and capable of withstanding moderate-to-high risk, investment in growth funds can significantly enhance the portfolio potential.

How does growth mutual funds work?

• Diversified growth portfolio: Growth funds invest in high-growth stocks, offering a diversified portfolio of companies with significant revenue and profit potential. The main objective is to maximize capital appreciation.
• Risk and horizon: These funds are considered riskier but are suitable for investors with a medium-to-long-term horizon who can tolerate short-term market fluctuations.
• Focus on capital gains: Growth funds generally avoid companies with high dividend yields. Instead, they prioritize capital gains and aim to generate potential returns.
• Reinvestment strategy: Any gains from growth funds are usually reinvested into the portfolio. This strategy leverages the power of compounding to boost returns over time potentially.

What are the types of growth funds in India

• Large-cap growth funds: These funds invest in well-established large companies that are anticipated to grow at rates higher than average. They primarily focus on firms with a strong track record of growth and stability.
• Mid-cap growth funds: These funds invest in medium-sized companies and aim for substantial growth potential. Although, they may carry higher risk compared to large-cap funds.
• Small-cap growth funds: These funds concentrate on smaller, early-stage companies with high growth potential, but they do come with higher risks due to their early stage of development.
• International or global growth funds: These funds invest in growth-oriented companies located outside the investor’s home country, offering global exposure and diversification but also introducing currency risk and additional complexities.

Advantages of investing in growth funds

• Potential for high returns: Growth funds offer the potential for significant capital appreciation over the long term, making them suitable for investors seeking higher returns.
• Diversification: Growth funds typically invest in a diversified portfolio of stocks across different sectors and industries, reducing the impact of individual stock performance on the overall portfolio.
• Professional management: Growth funds are managed by experienced fund managers who conduct in-depth research and analysis to identify high-growth investment opportunities, providing investors with access to professional investment management expertise.

Disadvantages of investing in growth funds

• Higher volatility: Growth funds tend to exhibit higher volatility compared to debt funds, as they invest in equity of companies with higher growth potential, which may also be more susceptible to market fluctuations.
• Risk of underperformance: Despite the potential for high returns, growth fund also carries the risk of underperformance, particularly during periods of market downturns or economic uncertainty.
• Higher expense ratios: Growth funds may have higher expense ratios compared to passively managed mutual funds, as the active management and research efforts involved in identifying growth opportunities can result in higher fund expenses.

Conclusion

Growth fund offers investors the opportunity to participate in the potential growth of companies with strong earnings and revenue prospects. While these funds come with higher risk and volatility, they also offer the potential for significant returns over the long term.

FAQs:

What is the benefit of growth fund?

The primary benefit of growth fund is the potential for capital appreciation over the long term. These funds invest in companies with high growth potential, offering investors the opportunity to participate in the potential success of innovative and expanding businesses.

How to invest in growth mutual funds?

Investors can invest in growth mutual funds by opening an account with a brokerage firm or mutual fund company and selecting a growth fund that aligns with their investment objectives and risk tolerance.

Which is better growth or dividend?

The choice between growth and Income distribution cum capital withdrawal (IDCW) options depends on an investor's investment goals, risk tolerance, and financial circumstances. Growth option focus on capital appreciation, while IDCW option prioritise potentially regular income through periodic IDCW.

Is growth fund taxable?

Growth funds are subject to equity-oriented fund taxation on capital gains realized from the sale of fund shares. Long-term capital gains from investments held for more than one year are taxed at a lower rate than short-term capital gains from investments held for one year or less.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.