What are Growth Funds?
Growth Funds: An Introduction
A growth fund is a type of mutual fund with high risk and high gain, and which invests in companies with fast-paced progress or companies having high potential. Growth funds are funds with which one can expect high volatility and equally higher gain or loss. The focus of investment of growth funds is towards companies which are not yet fully developed or where there is a high potential for growth. For instance, Paytm; very few among us knew the name until demonetization in November 2016. However since then, Paytm’s the word in the market. These funds help the companies with high potential to unlock their true value and bring the gem out in the market. But growth funds carry substantial risk with them, as there is no perfect formula for success each time. So if the potential of the companies isn’t unlocked, there can be a substantial loss. One more thing that is common in these companies is the earnings these companies make is reinvested again in the R&D or expansions, unlike other established companies who opt for dividend distribution.
Who Should Invest Growth Funds?
This fund is purely for risk-embracing people, who have the ability to digest the market volatility. Therefore people who have other stable portfolios can park some free funds in Growth Funds. On the contrary, people in retirement or nearing retirement or new investors should strictly avoid this route. Further due to high return nature of the investment, it must be noted that Growth Funds also attract substantial tax on capital gain.
Types of Growth Funds
Growth funds in itself are a type of mutual fund, which differs from value fund. There are no distinct types of Growth Funds; however, they may be segregated on the basis of risk and volatility. Growth funds normally consist of high potential companies, and some of these companies might be ready to hatch, while some might require more time. Depending on the market situation, the fund manager has a task at hand to identify the right companies and divide the risk.
How Growth Funds Differ from Value Fund?
Value funds are stocks which are sold at a price lower than its value. In short, funds that are brought at a bargain price are nothing but value stocks. One common thing in both growth and value funds is the analysis of future, which decides the ultimate profit. In Growth funds, the analysis is to predict the future, while in value funds the analysis is to predict the true value of the stock.
Benefits of Investing in Growth Funds
The most obvious benefit of growth funds is higher returns. It is just a matter of unlocking the potential of the company. Unlike other stable funds who rise steadily, growth funds grow at a higher pace and hence give extraordinary returns compared to other funds. The targeted stocks are generally of companies with a technological background, consumer goods, or patented products where demands can be significant, thus making them profitable in a short period of time.
If there is a company who has the potential to grow, investing in such a company alone could be highly risky. Growth funds can help one to diversify their investment by dividing the risks among other investors and thus mitigating the risk to an extent. Further investing only in stable funds by avoiding risks, can stagnate the growth of investment. Therefore, parking some part of an investment in growth funds can always be helpful since a loss here can be set off against a profit at other funds. But on the other hand, profit here can surpass all others.
Don’t be surprised to see this as a benefit, because the income tax act provides an option to set off a capital loss against capital gain. Therefore, if you generate capital gain in some other investment, you can avoid the tax by freeing up your funds here suffering loss and setting them off with the other profit. In short, this can be used as a tax planning tool in an emergency situation.
Attraction to Investors
It is always difficult to attract investors in mutual funds with lower returns. Today’s generation enjoys embracing risk and wants to watch their money grow at a fast pace. Growth funds can be a good option for risk-loving people with plenty of liquidity.
Good for Economy
These funds help in unlocking hidden gems in the corporate sector, many of which do not rise due to lack of funds. Growth funds bridge the gap between the needy and enthusiastic, and this combination can be lethal in achieving high growth. Therefore more and more individuals or companies could come into the picture and thus giving rise to the economy of the country.
List of Top Growth Funds
Principal Multi-cap Growth Fund
An open-ended mutual fund launched in the last quarter of the year 2000. The fund is moderately risky, with banking and IT companies its primary target. The fund has over the period of time given fairly high return with a maximum of a whopping 47.88% return in the year 2017.
HDFC Balanced Advantage Fund (G)
Established in the year September 2000, this fund has targeted private and public sector banks along with power generation projects. This fund has been termed as a moderately high-risk fund, but compared to principal multi-cap has failed to exceed the expecting returns. Below is the performance chart for one year.
Birla SL Frontline Equity Fund (Large Cap Fun Category)
Birla has been a fast-growing mutual fund company, with a proven track record of consistent higher returns. This fund is no stranger to the above fact, coming into the picture from August 2000, with main targets as fast-growing companies like FMCG, oil, etc.
ICICI Prudential Value Discovery Fund (Multi-cap Category)
Youngest of the above funds coming in from 2004, this fund has slowly risen in the minds of investors. This fund is quite popular among the advisors and the investors alike, mainly because of its higher return estimation.
Performance of Growth Funds in India
Growth funds primarily invest in fast-growing companies that provide a higher return in the relatively lower amount of time. In India growth funds are largely seen in multi-cap funds, which comprise of small and mid-cap stocks, paving a way to moderate risk. The Indian economy is slowly edging towards being a risk-embracing economy, as investors want returns rather than low risk and safe betting. However, excessive risk can tend to be dangerous, hence multi-cap funds help cater both to avoid excessive risk while enjoying better returns than large-cap stocks. Multi-cap funds have lots of fast-growing companies as its target, at the same time diversifying certain funds into more stable stocks to balance the risk.
It does not mean large-cap or mid-cap funds are not growth funds, however, their development is slower compared to the growth funds. The performance of growth fund in India has been steady and now on the rise, it is definitely worth the gamble.
How to Invest in Growth Funds?
Currently, there are various Asset Management Companies managing the funds with help of active research team. This is probably the easiest way to invest in growth funds since it is sometimes better to leave somethings to experts. However, one can also invest directly without any intermediary, if they have the knowledge about the market scenario and the fund on the offer. Just like normal mutual fund the pre-requisite are same, example, a Demat account, KYC compliance and other formalities. The main question is about identifying the right fund if you can do that there is no other best way to invest.
Taxation on Growth Funds
Tax is an important perspective while deciding an investment of any nature. Therefore, it is always wise to plan before and take an informed decision. Growth funds are subject to tax on long-term capital gains at a rate of 10% on the total gain, provided the same (total gain) rises above rupees one lakh. While the long-term capital gain is taxed when you hold the investment beyond 12 months period, if you decide to liquidate it before the end of 12 months, the total gain is taxed at the rate 15% by the name short-term capital gain.