Growth Mutual Funds – Growth Funds Benefits, Risks & Tax Efficiency
Choice of mutual funds
An investor can choose from a range of mutual fund schemes to invest in towards their financial goals. Some schemes invest in high-growth companies, dividend paying companies, value companies, companies that are a part of a broader market index, or a part of a sectoral or thematic index, etc. This blog will focus on growth mutual funds, their benefits, risks and tax efficiency.
What is growth fund?
A growth fund invests most of the scheme money in equity shares of companies that have the potential to deliver high growth in revenues and profits. These growth companies reinvest all or most of their profits in expanding their operations into newer geographies, newer verticals, research & development, acquisitions, etc., to continue growing at a faster clip. As all or most of the profits are reinvested in the business, these companies either don't pay any dividends or very little dividends.
Who should invest in growth mutual funds?
Growth mutual funds invest mostly in shares of high-growth companies. The high-growth companies carry a higher risk than other companies. When the economy and stock markets are doing well, the companies report good revenue and profits. As a result of which, the share prices of these companies do well and reward their shareholders with capital gains. However, when the economy and stock markets are in a downward trend, the revenue and profit growth of these companies may be lower. As a result, the share prices of these growth companies may fall more than other companies. Hence, high-growth mutual funds are high-risk, high-return investment products. So, investors with an aggressive risk profile should invest in growth mutual funds.
Also, it may take a few years for the growth story of such companies to play out. The share prices of these companies will rise gradually over the next few years as the growth story plays out. Hence, investors with a longer investment time horizon may consider investing in growth mutual funds to benefit from the long-term capital appreciation.
Features and benefits of growth funds
Some of the features and benefits of growth mutual funds include:
- Growth funds have the potential to generate inflation-beating high returns. They can create wealth for their investors as the growth story of the companies that they have invested in plays out.
- Growth funds are high-risk, high return funds. While they have the potential to give high returns, they come with high risk. When the stock markets are not doing well, they have a tendency to fall more than other companies. Hence, only investors with a high-risk profile should invest in high-growth funds.
- High growth funds enjoy the tax efficiency of equity mutual funds as they invest more than 65% of their overall assets in shares of high-growth companies. When you sell your growth mutual fund units within a year of purchase, the short-term capital gains tax will be levied at 15%. When you sell your growth mutual fund units after a year of purchase, the long-term capital gains are taxed at 10% without indexation after exempting the first Rs. 1 lakh.
Disadvantages of growth mutual funds
Some of the disadvantages of growth mutual funds include:
- Growth mutual funds carry high risk. The shares of companies that they invest in trade at high P/E valuations. During a market downturn, these shares usually fall more than other companies. So, in a market downturn, the losses of growth mutual fund investors will usually be higher than others.
- Growth mutual funds invest most of their scheme money in shares of high-growth stocks. These high-growth stocks invest all or most of their profits back into the business. As a result, either they don’t declare any dividends or declare very less dividends than other companies. So, as an investor, if you are looking for regular dividend income, then growth mutual funds are unlikely to provide that.
- How to invest in growth mutual funds?
There are various ways of investing in growth mutual funds. Some of these include:
- If you have already shortlisted the growth fund you wish to invest in, you can invest directly through the AMC website. When you opt for the direct plan, you can save in the form of a lower expense ratio..
- If you are looking for advice on your risk assessment, asset allocation, financial goal plan, etc., you can register on an online intermediary website such as Glide Invest. You will get hand holding on your entire goal planning, from goal identification to achieving the financial goal.
- You can also approach an offline individual financial advisor such as a mutual fund distributor (MFD). An MFD can help you right from goal identification to goal achievement.
- While investing in growth funds, you can either invest a lumpsum amount or start a systematic investment plan (SIP). It is recommended that you start a SIP to overcome market volatility through Rupee Cost Averaging (RCA).
Growth funds are a good avenue for wealth creation
Growth funds invest in high-growth companies. As these companies are growing at a faster pace, they have the potential to generate inflation-beating high returns. Thus, growth funds are a good avenue for wealth creation and achieving financial goals.
To start investing in mutual funds as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.