Growth Funds – Definition, Features, and Benefits
You can opt for a growth or dividend option if you invest in an equity mutual fund. A growth fund invests primarily in younger but promising companies that can generate high returns.
What is a Growth Fund?
A growth fund is a diverse stock portfolio with a primary objective of capital appreciation, with little or no dividend payouts.
That's why they're looking for companies with a proven track record of large revenue growth or prospective younger companies. The risk is also on the greater hand on the flip side.
This high-risk, high-reward mantra is perfect for those who do not retire soon. Investors require a risk tolerance and a holding period with a 5-10 year time horizon.
Growth fund holdings frequently have multiples of high price-to-earnings and price-to-sales. This investor trade-off is the above-average income and income produced by these firms.
Together with value funds, these funds are one of the primary types of equity mutual funds. They are divided into small, medium and large market capitalization groups.
Benefits of Growth Funds
A portfolio of growth funds consists of companies that record rapid progress and can produce greater yields to investors. Let’s look at some advantages of investing in growth funds.
Diversification is helped by having a mix of growth stocks in a mutual fund. Consequently, it reduces to some extent the overall risk of investing in volatile stocks.
As an investor, knowing that growth funds are for individuals with more risk tolerance is essential for you. However, growth funds can expand significantly in the long run.
High-Risk High Return
Because of its capital appreciation potential, this fund draws many investors. Professional fund managers put a lot of effort into identifying and picking up these stocks.
Growth funds attract 10 percent long-term capital gains tax or LTCG tax if earnings exceed 1 lakh and are kept over a year. They are, however, more tax-efficient than value funds.
A team of skilled experts is managing a growth fund that identifies growth stocks for investors. The stock purchasing and selling choices are also left in the managers' specialist hands. It, therefore, leaves your position to be restricted to a passive investor's role.
These funds involve a management fee and will, therefore, cost you more in terms of your expense ratio. The AMC will also use a portion of your profit to pay the charges annually.
Demerits of Growth Funds
Impact of Market Volatility
One significant disadvantage of growth funds is that they are highly volatile with a sudden increase and fall in stocks. The growth fund's downfall is that you're left exposed to the risk of losing the entire quantity of investment.
Growth funds may not provide periodic dividends, bonuses, interest, bonuses, etc. yields. Because it includes stocks with little or nearly no dividend payouts, a growth fund manager has little stake in companies that pay out dividends.
If you want to benefit from a growth fund, you'll need to be willing to commit to the fund for 5 to 10 years. Therefore, for those wishing to create a fast profit in a brief period, a growth fund is not an ideal investment option.
Growth funds are tools for high-risk investment. So, only invest if you're an aggressive risk-taker. It can generate high yields for this reason. If you're near your retirement age, not investing in it would be prudent. It's an investment for the long term. If you are risk-tolerant and willing to invest for at least 5 to 10 years, then only choose to invest in growth funds.
Even if you can leave the fund prematurely, the hefty exit load goes with it. The only returns will be from the sale of the funds and the surplus selling price over the purchase cost will be your profit. If you believe that's right for your investment persona, go ahead and invest in growth funds. Younger investors, therefore, consider them particularly attractive with the advantage of long-term investment at hand.