What is a Growth Fund: Definition and Benefits

Mutual funds have been classified depending on different factors like risk appetite, investment goals, and asset classes. Growth funds have emerged as a popular investment option as they have proven to generate high returns.

In this blog post by Shriram AMC, we will take a look at the features, types, and working of growth funds so that you can make an informed and calculated investment decision.

What is a Growth Fund? Definition

A growth fund is a type of mutual fund that invests in companies having a potential for substantial growth to attain capital appreciation. These mutual funds mainly aim on generating high long-term returns. However, due to their concentration on high-growth stocks, they are also risky in nature. Organisations that have remarkable revenue growth and excellent prospects for the future are the primary focus of growth funds.

They typically make investments in fields that are innovative and promise revenue growth and market expansion. Growth mutual funds are designed for investors who have a high-risk tolerance and can invest for a longer period. A growth-oriented investment strategy is used by growth fund managers who select stocks that assure significant future returns.

How Does a Growth Fund Work?

A growth fund investment consists of high-growth stocks, thereby helping in diversifying the portfolio. Here’s how they typically work:

Identifying Growth Stocks

• Fund managers actively research and analyse companies with strong growth potential.
• They look for companies with innovative products, strong market positions, and robust financial performance.

Portfolio Construction

• The fund manager builds a diversified portfolio of growth stocks across various sectors and market capitalizations.
• This diversification helps to spread risk and reduce volatility.

Active Management

• Fund managers continuously monitor the performance of the stocks in the portfolio.
• They may buy or sell stocks based on changing market conditions and the company's performance.

Rebalancing

• Periodically, the fund manager rebalances the portfolio to maintain the desired asset allocation.
• This involves selling overperforming stocks and buying underperforming ones.

Risk Management

• Fund managers implement risk management strategies to protect the portfolio from downside risks.
• This may involve hedging techniques or limiting exposure to certain sectors or stocks.

By following these steps, growth mutual funds aim to deliver superior returns to investors over the long term.

Features of a Growth Fund

The features and benefits associated with a growth fund are listed below: · High Returns: The capital appreciation offered by growth funds is the reason why it is favoured by investors. Mutual fund managers put significant efforts to select such high-growth stocks.

• Volatile Stocks: Since the stocks experience abrupt growth and fall, growth funds come with the risk of high volatility. Thus, they are best suited for those with a high-risk tolerance.
• Professional Money Management: Growth funds are managed by a team of experts who are well-versed with selecting growth stocks. It is the fund manager’s decision to buy or sell the stocks.
• Portfolio Diversification: Making investments in different growth stocks facilitates diversification. This way, this risk of investing in volatile stocks is minimised.
• Extra Charges: A management fee is required for growth funds; therefore, this can result in additional charges. This fee is called the expense ratio, and it includes the operating charges, management charges, etc.

 

Types of Growth Funds

The various types of growth funds are listed below:

• Small-cap growth funds: Small-cap growth funds invest in industries that are in the initial phase of growth. While they are high-risk funds, they can provide substantial returns.
• Mid-cap growth funds: Compared to small-cap growth funds, mid-cap growth funds carry lesser risk and have the potential for rapid growth.
• Large-cap growth funds: In these types of funds, 80% of the whole corpus is invested in large-cap companies. These are well-established businesses with market capitalisations ranging from 1 to 100.
• Sector-specific growth funds: Some growth funds invest in a particular type of industry or sector. With sector-specific growth funds, you have the option to concentrate on industries that may grow exponentially in the future.
• International/global growth funds: International/global growth funds allow you to invest in development-driven companies outside of the country. These funds broaden a portfolio's diversification beyond its local markets and expose you to the potential for global growth.

 

Who Should Invest in Growth Funds?

It is advisable to invest in growth funds if you can deal with the risks associated. Investing in these funds might not be ideal if you are nearing your retirement. To get the best returns, growth funds require you to stay invested for 5 to 10 years. The fund has an exit load despite the fact you can leave it early.

For this reason, growth funds particularly draw younger investors who are interested in long-term investment and have a bigger risk appetite. Tax Implications of Growth Funds

The Union Budget 2024 introduced significant changes to the tax regime for various financial instruments, including mutual funds. Here's a breakdown of how these changes impact growth funds:

Short-Term Capital Gains (STCG)

• Holding Period: If you sell your growth fund units within 12 months of purchase, the profit you make is considered STCG.
• Tax Rate: This STCG is taxed at your marginal income tax rate, which can be quite high, especially for higher income brackets.

 

Long-Term Capital Gains (LTCG)

• Holding Period: If you hold your units for more than 12 months, the profit is considered LTCG.
• Tax Rate:
• For gains realized before July 23, 2024: A 10% tax rate applies to gains exceeding ₹1 lakh in a financial year.
• For gains realized on or after July 23, 2024: A 12.5% tax rate applies to all long-term capital gains, regardless of the amount.

 

Wrapping Up

Growth funds can be an effective tool for building long-term wealth. However, it is crucial to understand the risks involved and to choose a fund that aligns with your investment goals and risk tolerance. Consult an investment advisor before investing if you are still new to the domain. Shriram AMC might be your trusted partner in your investment journey. Head over to our website today to get started.
 

FAQs

Here are a few frequently asked questions about growth mutual funds:
 

1. Are growth funds safe?

Growth funds are considered risky owing to the fact that they invest in rapidly growing companies. Although they deliver better potential returns, they are also vulnerable to market fluctuations and volatility.
 

2. Should I invest in growth funds?

Before investing in growth funds, you need to evaluate your investment horizon, financial objectives, and risk appetite. A growth fund could be suitable for you if your goal is long-term capital appreciation, and you are comfortable with market fluctuations.
 

3. Is it possible to start with a small investment in a growth fund?

Yes, you can start investing small sums of money in a growth fund.
 

4. What is capital appreciation?

Capital appreciation signifies a rise in the market value of an investment.
 

5. Is there a lock-in period for growth funds?

Growth funds are open-ended mutual fund schemes which is why they do not have a lock-in period with the exception of equity-linked savings scheme (ELSS). You can redeem the units in your growth fund as and when required.