What Are Growth Mutual Funds?

While investing in equity funds, you will have two options to invest, growth or dividend funds. A growth mutual fund mainly invests in relatively younger but promising firms that can offer excellent returns against your investments.

Now, you may be wondering what growth funds are, how they work, what their types and benefits are.

To know about them, check the information as mentioned below.

What Is the Meaning of Growth Mutual Funds?

Growth mutual funds aim to achieve relatively higher capital appreciation than other funds by investing in growth stocks. These funds mainly focus on companies or organisations which exhibit remarkable growth potential. Also, these funds include stocks with little or next to no dividend payouts.

Younger companies normally offer their stock at a lesser price and tend to expand their business. Their financial growth does not become saturated, unlike the established firms. All these make such companies a good option to invest in for a high return yield.

But growth through capital gains does have a catch. Growth stock mutual funds are an extremely volatile option in contrast to other funds. Such funds tend to fall more in bearish markets and rise more in bullish markets in contrast to other funds.

What Are the Types of Growth Mutual Funds?

As per their market capitalisation, growth stock mutual funds are split into three types – small cap, mid cap and large cap funds.

Large Cap Funds	Mid Cap Funds	Small Cap Funds
As open-ended equity funds, they invest at least 80% of their total assets in large cap company stocks. Large cap firms are reliable.	As open ended equity funds, they invest in at least 65% of their assets in mid cap firms.	These open ended equity funds invest a minimum of 65% of their assets in small cap stocks.
These funds are less risky.	Such funds are riskier than large cap funds but less risky than small cap funds.	These funds are the most risky
They offer steady returns over a long period. The average 5 years return is 7%.	These funds offer more returns than large cap funds. Their average return over 5 years is 10.28%	These funds offer the highest returns. The average 5-years return is 14.72%.

How Do Growth Mutual Funds Work?

As mentioned above, growth mutual funds invest in companies’ stock with fast-paced progress to deliver high returns to investors. The earnings then get utilised by these firms in their research, developments and business expansion further.

Here is an illustration to help you understand the scenario -

Suppose you purchase 100 units of stock at Rs. 20 each, then your investment at that time will be Rs. 2,000. After a year, you decide to sell these 100 units of stock for Rs. 30 (each unit). Then the difference of Rs. 1,000 is your capital gain from your growth stock.

This is how growth stock funds function.

What Are the Benefits of a Growth Mutual Fund?

Growth funds bring along a range of benefits for you. Please take a look at them below.

High Growth Potential: You will enjoy excellent returns against your investments in growth stocks.
Tax Benefits: Growth stock mutual funds attract long term capital gains tax (LTCG tax). Tax gets levied at 10% if your earning exceeds Rs. 1 lakh and is held beyond a year. However, such funds are more tax-efficient in contrast to value stock funds.
Diversified Portfolio: A mix of growth stock funds in your portfolio always helps in its diversification. It helps you earn high returns along with controlled risks.
Fund Management: Experienced fund managers take the responsibility of managing and administering such funds. The entire activities starting from buying and selling of choices are left with these managers. Hence, it avoids all the hassle of monitoring funds on a daily basis and saves you from all operational tasks.

Who Should Invest in Growth Mutual Funds?

If you have a high appetite for risks and seek a stock with high returns, then you may consider investing in these funds. In case you have retired or nearing your retirement, then consider not investing in such funds. Having a long term investment horizon of 5-10 years is crucial to investing in these high growth stocks.

With such funds, you can exit early; however, they come with an exit load. You will earn your returns only through the profits generated from selling these funds. In case this suits your investment persona, you may consider investing in growth mutual funds.

How to Invest in Growth Mutual Funds?

How to buy growth stock mutual funds? Well, Investing in such funds is easy. Here are some pointers -

You can invest in them directly through an AMC (Asset Management Company) or a broker. These funds are available as regular and direct plans.
For a direct plan, you must possess considerable awareness of the stock market to make the right choice. In this case, you will need to check a fund’s returns history, expense ratio, and other details before choosing one.

However, regular plans are suitable if you have less knowledge and want to avoid researching and monitoring a fund. In this case, all these activities are taken care of by fund managers.

Things to Consider Before Investing in Growth Mutual Funds

Here, we have listed a few important pointers of such high growth funds below.

Risk Prone: Growth stock mutual funds are subject to high risks.
Prone to Depreciation: Such funds may decline rapidly at times based on market demand and thus depreciate the stock’s value.
No Dividend Returns: Such funds may not yield you regular returns from dividends, interest, bonuses, etc.
Not Suitable for Short-Term Investment Horizon: If you seek profits in the short run, these funds are not suitable for you.

Thus, growth funds in India offer excellent returns against your investment in them. However, you must be ready to be patient with these funds and must possess a long term investment plan. Also, you must be ready for any risk as such funds are extremely volatile.

Frequently Asked Questions

All

Is investing in growth funds worth the money?

It depends on your investment motive. If you seek only high returns from your investment, then a growth fund is a good option. However, if you seek fixed and steady returns over a long time, such funds may not be suitable.

What is the primary difference between growth and dividend funds?

The growth option offers returns in the form of rising values of mutual funds units. At the same time, the dividend option offers returns through dividends periodically.