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Investment Simplified > Mutual Funds > Guide to Growth Funds
Mutual Funds

Guide to Growth Funds

Lakshey Bahl
Lakshey Bahl June 21, 2022 10 Min Read
Updated 2022/09/12 at 4:34 PM
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A Mutual Fund is a bucket of stocks/securities/bonds chosen around a theme. It has numerous investors and is managed professionally. The amount contributed by each investor is invested in stocks/securities/bonds of the fund, proportionate to their weights in the bucket. The investor, however, doesn’t have any ownership of the underlying asset. She/he just owns the units of the mutual fund.

Contents
What Is a Growth Fund?How a Growth Fund Works? How to Invest in Growth Funds?Features and Benefits of Growth FundsTypes of Growth FundsPerformance of Growth FundsWho Should Invest in Growth Fund?Tax Implications on Growth FundsHow to Choose a Growth Mutual fund?Top Performing Growth Mutual FundsThings to Consider Before Investing in Growth Mutual FundsDisadvantages of Growth FundsConclusionFAQs

What Is a Growth Fund?

While looking to invest in Mutual Funds, depending on financial goals, we broadly have a choice between dividend and growth mutual funds. In a Growth Mutual fund, the profits are continuously reinvested. The reinvestment of profits leads to an overall higher return in Growth Mutual funds, as the returns on profits keep compounding. Also, growth funds show a higher NAV than dividend funds in the long run.

How a Growth Fund Works?

The high-reward and high-risk mantra of growth funds makes them ideal for the individuals who are not planning to retire anytime soon. Typically investors require a holding period and a tolerance for risk with an approximate time horizon of 5 to 10 years.

How to Invest in Growth Funds?

  • Growth funds tend to outperform the value funds in the concluding stage of an economic cycle.
  • Wise investment is thereby recommended since this phase represents the time where recession begins. When investing in growth fund, it is imperative to keep in mind that there is no one size fits all or a choice which works for all investors in the same fashion.
  • Prepare your finances well
  • Get acquainted with the approach of the growth
  • Select stocks and buy growth funds
  • Screen for growth stocks and focus on maximizing returns.
growth fund

Key Takeaways

  • A growth fund is a type of mutual fund that includes companies which are primed for growth in earnings and revenue at a pace much faster than other peers in the industry and in the market altogether.
  • Growth funds can be categorized into small, mid- and large cap growth funds based on market capitalization.
  • A majority of growth funds are high-risk and is thereby, the best suited option for individuals looking for long-term investments and a high-tolerance for risk.

Features and Benefits of Growth Funds

  • Potential for high returns due to compounding 
  • Tax Efficiency as these funds mostly attract only Long Term Capital Gains Tax
  • Professional Management by people who have experience and specialization in maximizing returns per unit risk
  • Diversification of investment, but investing in a bucket of stocks instead of a single one.

Types of Growth Funds

Growth Mutual funds can be Direct Growth or Regular Growth plans. In the case of a Direct Growth Plan, you invest directly with the fund house – either by visiting the website of the AMC or Registrar and Transfer agents (KARVY & CAMS) or by visiting their offices.

On the other hand, a Regular Growth plan requires investment in the mutual fund through a mutual fund distributor who charges a fee for his/her services. Consequently, the returns of a Direct Growth plan are always slightly higher than a regular plan. 

Growth Mutual Funds that invest in Equity are Equity Growth Mutual Funds. There can be different types of Equity Growth Mutual Funds based on the market capitalization of the underlying equity stocks. 

Large Cap Funds

When Growth Mutual Funds invest majorly in equity stock of companies with a market capitalization of Rs. 20000 crore /- or more are Large-Cap Growth Mutual Funds. These companies are usually the market leaders in their particular industry segment.

They have usually been displaying consistent growth trends for a long time, hence are the least risky equity growth funds. As a result, they are most suited to investors seeking to invest at relatively low risks for the long term. They reap the benefits of compounding continuous returns.

Mid Cap Funds

Mid-Cap Growth mutual funds invest in equity stock of companies with a market cap greater than 5000 crore/- and less than 20000 crore/-. These companies usually perform more than large-cap companies during bull runs. But they also carry a higher risk. The returns of some Mid-cap Growth mutual funds in India are as follows.

Small Cap Funds

Similarly, Small-Cap Funds invest in equity stock of companies with a market capitalization of less than 5000/- crore. These funds have a high potential to grow and are the riskiest of all 3. Many of these companies have very aggressive growth targets, making them more vulnerable to market and other risks.  

Mid-Cap Funds

Apart from these, Multi cap growth funds invest across market capitalization stocks. As a result, they are more diversified and have a lower risk than pure large, mid or Small-Cap growth funds. The returns for the best multi-cap growth mutual funds in India can be seen below. Multi cap growth funds, invest according to prevailing conditions, irrespective of the market cap.

growth fund

Performance of Growth Funds

One of the highest-performing stock funds have been growth funds. If taken the example of Morgan Stanley multi-cap growth fund, it has been the best-performing stock fund with an annual return standing at 23.3 per cent.

Who Should Invest in Growth Fund?

Growth funds are long-term investment options best suited for investors with an investment horizon of at least 5-10 years. Investors nearing the age of retirement can choose this type of fund. This is because the investment horizon of this type of investment is short, approximately 3-4 years. Also, young investors with a horizon for investment greater than 10 years must look at investing in these funds. A growth mutual fund is best suited for investors who choose to invest aggressively.

Tax Implications on Growth Funds

Short-term gains from growth mutual funds are taxable at a rate of 15 per cent. Long-term capital gains on the other hand are taxable at 10 per cent. The long-term capital gains tax stands at 10 per cent in case an individual’s earnings exceed INR 1 Lakh on an annual basis or if the units of mutual funds are held for a time greater than a year.

How to Choose a Growth Mutual fund?

The selection of mutual funds depends on some important parameters. They can be:

  • Goals

In order to choose the right mutual fund, it is important to keep your goal/target in mind. Be it the goal of fulfilling a down payment of your house or other utility goods.

  • Risk

Prior to investing and choosing a mutual fund, it is wise to analyze the associated risks that can come with the investment. It is important to recognize and invest in a growth mutual fund that is more stable.

  • Investment strategy

A majority of investors ignore this crucial aspect of investing. The strategy of your investment plays a critical role in the success of your portfolio of growth mutual fund investment.

  • Performance of the fund

In order to ensure consistent returns on mutual funds over a given period of time, it is essential to ensure that the investment has undergone multiple market cycles. The performance of the fund must be considered for a reasonable frame of time.

growth fund

Top Performing Growth Mutual Funds

Fund Name3 Year Return5 Year Return
Tata Digital India Fund Direct-Growth29.08%29.20%
ICICI Prudential Technology Direct Plan-Growth31.37%28.15%
Aditya Birla Sun Life Digital India Fund Direct-Growth30.46%27.16%
SBI Technology Opportunities Fund Direct-Growth27.11%26.07%
Quant Infrastructure Fund Direct-Growth43.41%23.62%
Quant Tax Plan Direct-Growth43.58%23.45%
Quant Active Fund Direct-Growth39.08%23.06%
Quant Small Cap Fund Direct Plan-Growth53.89%22.15%
Quant Mid Cap Fund Direct-Growth39.78%21.87%
Axis Small Cap Fund Direct-Growth31.92%21.37%

Things to Consider Before Investing in Growth Mutual Funds

  • Level of risk

First, it is vital to understand that each and every mutual fund category differs from one another. Also, the level of risk associated with each of the growth funds differ.

  • Look for higher returns

An investor must know that direct plans always generate higher returns as contrast to the regular plans. This is because the expense ratio of direct plans is less as compared to regular plans.

  • Consistency in returns

The more consistent the returns are on a growth fund, the better it is. A growth fund which is consistent generates better returns on an annual basis (Long-term).

Disadvantages of Growth Funds

  • One of the biggest disadvantages of growth fund investment is that these funds are highly volatile. For example, in a particular year it will be possible to fetch a 20 per cent return on investment and in the year that follows it is possible for the fund to lose 7 per cent.
  • A growth fund investment is a long-term investment commitment. If you wish to genuinely benefit from the growth fund, it will be required to dedicate quite a number of years to the investment which poses as a drawback of growth funds.
  • Growth fund investments comes with a cost. A majority of growth funds with a higher degree of active management will also charge a higher amount in the expense ratio.

Conclusion

‘Growth Mutual fund’ is sometimes also used to refer to a fund that invests majorly in equity stocks with high growth potential.  Growth funds are long term holdings or a long term investment. This indicates a time span of almost 3 years and often extends up to 10 years or higher. It is a long-term investment option and requires a wise investment approach.

FAQs

1. Is investing in growth funds worth the money?

Growth funds are a wise investment option for investors looking for long-term investments. It also has a potential for higher returns.

2. What is the primary difference between growth and dividend funds?

The primary difference between growth and dividend funds is that profits are distributed in case of dividend funds and re-invested in case of growth funds.

3. Which growth fund is best?

Direct growth fund is the best type since it does not involve a distributor and any fee or charges.

4. Is growth fund taxable?

Yes. Growth funds attract LTGC at 10 per cent if an individual’s earning is higher than INR 1 Lakh and held on to for more than a year.

5. How is mutual fund growth calculated?

To calculate mutual fund growth, use the formula {[(current NAV/beginning NAV)^(1/the number of years)]-1} x100. Here, NAV stands for the net asset value.

6. Which is better growth or dividend?

The net asset value for growth funds is always higher as compared to dividend funds. This is because the re-investment of profits in growth funds, grows in terms of value with the passage of time.

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