When investing in equity funds, investors primarily can select between growth and dividend funds. The growth funds invest in potentially growing companies to generate higher returns on investment. The primary goal of these funds is capital appreciation.
As an investment option, growth funds are pretty popular. But are they the right investment choice? Let’s understand growth funds and why these should be in your portfolio.
What are growth funds?
Growth investment is a popular investment theory where investors pick stocks from companies with high growth potential. Hence, they select companies with a proven track record or young companies with potential for tremendous growth. But on the other hand, it also increases the risk of investment as these companies are highly susceptible to market fluctuation.
Growth mutual funds also select such companies. However, instead of concentrating on a single sector or business, the fund managers invest in a portfolio for a balanced risk return. A growth mutual fund portfolio is made of companies that have registered fast-paced growth and can deliver significant returns to the investors. These companies often reinvest their profit in research and development, expansion and acquisition to continue to grow. As there is no dividend payout, these businesses reutilise their funds to sustain on a high-paced growth path. However, when the market falls, these companies can also lose their values significantly. It can hit the investors badly, just as it can deliver manifold growth during market expansion.
Types of Growth Mutual Funds
The below classification helps investors choose the right type of growth fund based on their risk tolerance, investment goals, and market outlook.
- Large-Cap Growth Funds: These funds invest in large, established companies expected to grow consistently. Ideal for investors looking for stability alongside growth.
- Mid-Cap Growth Funds: Target mid-sized companies that exhibit potential for higher growth. These funds balance risk and reward, offering a mix of stability and high growth potential.
- Small-Cap Growth Funds: Focus on smaller companies with significant growth prospects. Higher risk but potentially higher returns.
- Sector-Specific Growth Funds: These funds specialise in specific sectors expected to outperform the market, such as technology or healthcare.
- International Growth Funds: Invest in growth-oriented companies across the globe, offering diversification and exposure to international markets.
Features and benefits of investing in growth funds
When it comes to investing in growth funds, there are quite a few benefits.
Potential to earn high returns: As mentioned before, growth fund managers target companies with high growth potential. They spend a good deal of time researching the market to find potential stocks for investment. Growth funds attract investors for their abilities to generate significant gain from capital appreciation.
Risk factors: Growth funds carry higher risk. Hence these funds suit investors with higher risk tolerance.
Investors investing in growth funds usually have a longer investment horizon since these funds tend to perform better when given time to ride over market fluctuations.
Stock volatility: One drawback of growth funds is that the stocks are highly volatile. Hence, only high risk-tolerant investors apply in these funds.
Tax-efficiency: Capital gains from growth funds are subject to long-term capital gain tax at a rate of 10 percent over Rs 1 lakh in a year. Still, these are more tax-efficient than other investment types.
Expenses: Growth funds are actively managed, meaning there are fund managers to manage your investment to keep it performing at the best rates. Hence, these funds charge higher fees than index funds or ETFs.
Active fund management: These funds allow general investors to harness the expertise and knowledge of professional fund managers indirectly.
Fund managers actively select stocks and make decisions regarding buying and selling to ensure portfolio performance.
Portfolio diversification: Growth funds invest in several growth stocks and hence, help with portfolio diversification. It helps reduce the overall risks of investing in volatile company stocks but increase return potentials.
Suitable for medium investment horizon: These funds are targeted primarily by investors with investment horizons of three to five years. Investors with a longer investment horizon of 5-7 years prefer value funds.
Disadvantages of growth mutual funds
Besides the long list of advantages, there are few disadvantages that investors should keep in mind while considering growth funds.
High risk: Although growth funds invest in companies with high potential to grow, these stocks are also subject to significant price swings, meaning susceptible market fluctuations.
Possibility of value depreciation: There are chances of losing initial investment with growth funds because these stocks are highly volatile. The value of these stocks increases and decreases with the market condition.
No dividends: Growth funds don’t pay out dividends. They reinvest the profit in research and development to sustain their growth. Hence, don’t suit investors wanting to receive a secondary source of income.
Long-term investment: Growth funds work better in the long run as it allows the stocks to tide over market fluctuations to generate higher returns. Hence, growth funds are not for investors seeking short-term gain.
What are Tax Implications on Growth Mutual Funds?
Understanding the tax implications is crucial for investors aiming to maximise their after-tax returns. When you invest in these funds, the returns you earn are subject to capital gains tax, which is categorised based on the duration the investments are held.
- Short-term Capital Gains (STCG): All profits are considered short-term capital gains if you sell your mutual fund units within a year of buying them. For equity-oriented funds, these gains are taxed at a flat rate of 15%, regardless of your income tax slab.
- Long-term Capital Gains (LTCG): For holdings that exceed one year, the gains are classified as long-term. In the case of equity-oriented mutual funds, long-term capital gains over ₹1 lakh are taxed at 10% without the benefit of indexation. This tax treatment aims to encourage longer holding periods by offering a more favourable tax rate on gains realised from investments held for over a year.
Additionally, dividends received from mutual funds were tax-free in the hands of investors until March 31, 2020. However, after this date, the Finance Act 2020 abolished the Dividend Distribution Tax (DDT), and now dividends are taxed at the investor’s income tax rate under “Income from Other Sources.” A TDS of 10% is also applicable if the total dividend received exceeds ₹5,000 in a financial year.
Should you invest in growth mutual funds?
Growth mutual funds invest in companies expected to proliferate, resulting in higher returns against higher risks. Hence, these aggressive mutual funds are for investors willing to take significant risks in the market. Investors ready to remain invested through market volatility should invest in these funds.
Growth mutual funds are ideal for portfolio diversification. But if you are a risk-averse investor, these funds may not suit you. Similarly, growth funds are not suitable for senior investors and investors saving for retirement. But young investors, who can take risks and plan to stay invested in the market for an extended period, should invest in growth funds for significant capital appreciation.
How to Invest in Growth Mutual Funds?
Investing in the Growth Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps:
Step 1:Log into your Angel One account.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2:Determine a growth mutual fund that suits your needs and risk profile. You can learn more about each large-cap fund on the Angel One app. Things to consider at this stage are as follows:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the growth fund(s) you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Conclusion
We hope the article has helped you learn about growth mutual funds. If you find the information meeting your investment needs and risk profile, go ahead and invest in growth funds. These funds would earn higher returns than other mutual funds.
FAQs
What kind of mutual fund is considered a growth fund?
An example of a growth mutual fund is the Axis Bluechip Fund. This fund primarily invests in large-cap companies with a high potential for growth, aiming to achieve long-term capital appreciation. It is well-suited for investors looking for exposure to top-tier companies with robust financial performance and stable growth prospects.
Is it good to invest in a growth fund?
Investing in a growth fund can be beneficial if you have a long-term investment horizon and a higher risk tolerance. Growth funds often invest in companies expected to outperform the market, which can lead to significant capital appreciation.
How is Growth Fund Calculated?
The performance of a growth fund is typically measured by its return, which is calculated based on the increase in the fund’s net asset value (NAV) over time, adjusted for any distributions such as dividends. The NAV is determined by dividing the total value of all the securities in the fund’s portfolio, minus any liabilities, by the number of fund shares outstanding.
Which mutual fund is better: Direct or Growth?
The choice between a direct or a regular (growth) mutual fund depends on individual preferences and circumstances. Direct mutual funds generally have a lower expense ratio, leading to potentially higher returns because they do not include intermediary fees. Regular mutual funds, on the other hand, involve higher expense ratios due to the inclusion of distributor commissions but offer the advantage of professional investment advice and services.
