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Growth Funds – Meaning, Features and Who Should Invest?

growth funds

What are growth funds?

Growth funds are a type of mutual funds that invest in growth stocks. Growth funds aim to earn returns through capital appreciation than dividends. These funds majorly invest in companies with good revenue growth and proven track record or young companies with the potential to grow.

Growth funds mostly are equity funds. They invest in companies that reinvest the profits of the business for research and development and expansions. These companies hardly pay any dividends. Hence dividend paying companies are of least interest to the growth fund managers. Growth companies are not necessarily large or mid cap companies. They are spread across large, mid and small market capitalization. Hence these funds have a diversified portfolio.

The returns from these funds are mainly dependent on the price of the underlying stocks. When the price of the underlying stocks goes up, the returns of growth funds are positive. During market rallies, the growth funds reap significant benefits. However, when the market falls, the returns from them are adversely affected.

Growth funds are a long term investment option. Hence the returns are taxable at the long term capital gains rate of 10% (if the gains are above INR 1 lakh). Hence, by investing for the long term, investors can save tax.

These funds best suit investors with an investment horizon of at least 5-10 years. Since the returns from these funds are primarily dependent on market movements, they suit investors with a longer investment horizon. Also, investors with a good understanding of risk and market volatility can invest in them.

Features of a growth fund

Growth funds invest across companies that have the potential for rapid progress. The fund believes that companies can produce greater yields to investors. Following are the features of growth funds:

Potential for significant returns

Typically, growth funds invest in high growth companies. High growth companies are companies that have faster growth than the market and capable of rapidly growing their earnings. Many investors invest in them because of their potential for capital appreciation. The fund manager and his team of experts spend a considerable amount of effort in identifying the right stocks.

Volatility

They are volatile investment options. Since these funds invest in highly volatile stocks, the performance heavily depends on market conditions. However, these funds have good potential to generate significant returns in the long term.

Investment Horizon

These funds are suitable for investors with a medium to long term investment horizon. The volatile nature of the fund demands a longer investment horizon to be able to generate significant returns. Hence, these funds are not suitable for short term investors. Additionally, while investing in them, one shouldn’t worry about short term market movements.

Expert money management

Professionals manage these funds. The portfolio manager and his team do thorough research, identify and shortlist companies with good growth potential. As an investor one doesn’t need to worry about buying and selling the stocks. The portfolio manager takes care of it and manages the money well. The fund manager aims to create a capital appreciation for the investors.

Diversification

These funds invest across fast paced companies. Hence it offers portfolio diversification to the investors. Also, diversification helps in addressing volatility to an extent.

Reinvestment

The gains from the funds are reinvested in debt or equities such that the investor can earn better returns. Also, many investors prefer these funds over the dividend option because they like reinvestment of gains into the scheme.

Benefits and limitations of growth funds

Benefits

Following are the benefits of growth funds:

Portfolio Diversification

Diversification helps in having a good mix of stocks in the portfolio. As a result, diversification helps in reducing the overall volatility of the investment. These funds invest across various companies that have the potential to earn significant returns.

Risk and Return

The companies across which a growth fund invests are highly volatile. Hence the volatility of the fund is quite high. Also, the portfolio heavily depends on stock market conditions. On the other hand, the high volatility of the fund is offset by the significant returns that the fund can generate. They have good potential to offer significant returns to their investors in the long term.

Expert fund management

Professional managers manage mutual funds. The team of experts conduct thorough research and identify stocks that have the potential to generate significant returns. Therefore, an investor doesn’t need to worry about buying and selling stocks. The portfolio manager, along with the team, will take all the investment decisions to generate returns to their investors.

Investment horizon

Growth funds are equity mutual funds. They invest in highly volatile stocks. Hence to address the volatility, the funds require a longer investment horizon. Therefore, investors with an investment horizon of more than five years can consider investing in these funds. The longer investment duration averages out the volatility and helps in generating significant returns.

Tax efficient

Since these funds are suitable for a long term investment horizon, they are quite tax efficient. They are equity mutual funds and hence attract 10% long term capital gains tax. 10% long term capital gains tax is on an investment held for more than one year. Also, the tax is applicable only if the gains exceed INR 1,00,000 in a year. Hence, by investing for the long term, investors can save tax.

Limitations

Following are the limitations of growth funds:

Market Volatility

Returns from these funds depend on stock market conditions. The stocks in which the fund invests in are highly volatile to market fluctuations. Therefore, in adverse market conditions, the fund‘s performance may be drastically affected.

No dividends

They do not deliver regular returns such as dividends, interest, bonus, etc. The focus of these funds is only capital appreciation, and hence it doesn’t pay any dividends.

Costs

Professional fund management comes with a certain fee. The asset management company charges a fee from investors for professional management services. It is always advisable for investors to pick funds with low expense ratio. A lower expense ratio will help in generating significant returns.

Who should invest in growth funds?

Growth mutual funds are long term investment options. Hence these suit investors with an investment horizon of at least 5-10 years. Investors close to retirement age can consider other funds. This is because their investment horizon is short (3-4 years), and growth funds are exposed to high volatility in the short term. Hence investors who are young and have an investment horizon greater than ten years can look at investing in these funds.

Growth mutual funds also best suit investors who are aggressive with their investing. Since the fund returns are affected by market movements and are exposed to high market volatility, they are a riskier bet. Hence investors who understand the risk in these funds can consider investing in them.

SIP and long term investing are a perfect combination for wealth creation. Investors who want to invest a small amount of money regularly for the long term can consider investing in them. This will help them reduce their average cost of investing and in turn, boost their returns through compounding. 

How to invest in growth funds through Scripbox?

Investing in growth funds can be done easily through Scripbox. One can follow the steps below to invest through Scripbox:

  1. Visit www.scripbox.com
  2. Choose a fund or plan to start investing.
  3. Create an account by either Signing up or logging in
  4. Invest and set up online transfers
  5. Track investments

Following are the documents that one requires to invest in mutual funds:

  • Photograph
  • Pan Card
  • Address proof (Aadhar Card (Both Front & Back)/Driving License/Passport/Voter ID Card)
  • Identity proof (Pan Card, Aadhar Card, Driving License/Passport/Voter ID Card)
  • Saving account details (including saving account number, branch and IFSC code)

Investments in these funds can be made either through Systematic Investment Plan (SIP) or lump sum route. Scripbox supports investments through both SIP and lump sum. Additionally, one can use Scripbox’s mutual fund calculator and SIP calculator to estimate potential returns from their investments. Moreover, Scripbox enables online investments that are entirely paperless. Therefore, one can easily invest and track investments using their Scripbox account.

Are growth funds and growth option in mutual funds the same?

No, growth funds and growth option in mutual funds are not the same. Growth funds are a type of mutual funds that invest in growth stocks. Whereas, growth option in mutual funds is a type of plan that investors can select while investing in mutual funds.

Growth funds invest companies that reinvest the profits back into business for expansion, acquisitions and research and development. Whereas, growth option in mutual funds reinvests the profits or returns from the fund back into the fund.

Growth funds are only one type of mutual funds. Whereas, the growth option is common to all mutual funds. Investors can choose from growth or dividend options while investing in mutual funds.

Growth funds only invest in growth stocks. Whereas, mutual funds with growth options do not have such restrictions. Mutual funds with growth options include all types of mutual funds, including equity, debt, and hybrid funds). They can invest in debt securities, dividend paying stocks, growth stocks, etc.

There is one similarity in growth funds and growth options in mutual funds. Both pay very less or no dividend to its investors.

What are the mutual fund types under the equity category?

Equity mutual funds invest a minimum of 65% of their corpus in equities or stocks. As equity funds invest in stocks, they have a significant amount of risk associated with them. Additionally, the returns are higher in comparison to other mutual funds. Following are the different mutual fund types that fall under the equity category:

To know more about mutual funds, types and how they work, read our guide.

Published on October 9, 2020