What are Growth Schemes?

When you invest in a mutual fund, you have to choose among investment options; one of them is growth fund. A growth fund mainly invests in younger but promising companies or companies with a proven track record of good revenue growth. But the risk is also high. These high-risk, high-reward growth funds are ideal for those who have a surplus of idle money, not retiring soon, have a tolerance for high risk, and can hold it for 5 to 10 years.

What are growth schemes in mutual funds or Growth Mutual Funds?

In a mutual fund, the fund that invests in growth stocks to attain maximum capital appreciation is a growth mutual fund. This type of fund usually invests in companies with a proven track record of delivering excellent returns or younger companies with high potential. As these schemes predominantly invest a major part of their corpus in equities or shares of companies, they are also known as equity schemes.

Here the primary aim is wealth creation or capital appreciation over the medium to long term to generate a higher return. However, growth funds have comparatively high risks. The growth schemes are best for long term investments.

Who should invest in Growth Funds?

As growth funds are high-risk investment instruments, it has the potential to deliver high returns. Therefore if you are an aggressive risk seeker or high risk-tolerant and you are willing to invest for at least 5 to 10 years, then you can definitely go for growth funds.

However, if you are close to your retirement age, it would be better not to invest in it. You can exit the fund early, but you have to bear a hefty exit load. On the other hand, young investors who are in their prime earning stage and have the objective of building a portfolio that gives them superior returns over the long-term can easily opt for this one.

Classification of Growth funds

Growth funds are typically split by market capitalization and grouped as follows:

• Large-cap funds – the biggest class of funds, with a nearly 10% market share that predominantly invest in companies that run large established business with a market capitalization value of above Rs.20,000 crores;
• Mid-cap funds – invest in mid-sized companies with a market capitalization of more than Rs.5000 crores but less than Rs.20000 crores;
• Small-cap funds – invest in small-sized companies with a market capitalization not exceeding Rs.5000 crores;

• Multi cap funds – invest in a mix of large, mid and small-sized companies;
• Sector funds – invest in companies of a particular sector (e.g., Technology funds invest in technology companies);
• Thematic funds – invest in a common theme (e.g., Infrastructure funds invest in companies related to the growth in the infrastructure segment;
• Tax-saving funds.

Characteristics of Growth Funds

High Reward

This fund attracts many investors due to its potential for capital-appreciation and earning a high return in the long term.

Risk Factors

The growth funds are for people who have more risk tolerance. But, in the long-run, growth funds grow substantially.

Stock Volatility

The extreme stock volatility is one of the major drawbacks of growth funds, with the stocks experiencing a sudden rise and drop. It is best suited for high risk-tolerant investors. When the market falls, it can hit the investors badly, while it can reap great capital gains when the market is high!

Additional Expenses

The growth funds charge a management fee and expense ratio is high. The AMC will deduct the fees annually from your profit.

Expert Fund Management

A growth fund portfolio is made up of companies with fast-paced progress that can deliver higher returns to investors. A team of qualified professionals identify these growth stocks for the investors and manage the fund. It comprises of stocks with little or no dividend pay-out. The decisions regarding buying and selling the stocks are also left in the expert hands of the managers. Hence, you can easily rely on them.

Diversified Portfolio

A growth fund is a diversified portfolio that mainly consists of companies with above-average growth that reinvested into acquisitions, expansion, and research and development (R&D). It is a mix of growth stocks and invests over a range of sectors to distribute the risk. This diversification reduces the overall risk of investing in volatile stocks to a certain extent.

Tax-Efficiency

Growth funds are tax-efficient. These attract long-term capital gains tax or LTCG tax of 10% if the earning is above 1 lakh and held more than a year.

Disadvantages of Growth Funds

High Market Risks

Most growth funds are usually at above-average risk. The downfall of the growth fund may leave you exposed to the risk of losing the entire investment amount.

Depreciation in Stock Value

These funds are highly volatile and also prone to decline in value. The stock value can fluctuate depending on market conditions.

No Regular Returns

Growth funds usually do not deliver regular returns in the form of dividends, interest, bonuses, etc.

Long-Term Holding

A growth fund is not for those who want to make a quick profit in a short period. If you really wanted to benefit from a growth fund, you have to hold it for a period of at least 5 to 10 years.

Growth schemes offer different options to the investors like dividend option, growth, etc. to choose as per their preferences. The investors have to indicate the choice in the application form but can change the options in the future. Therefore if you are having a long-term outlook seeking appreciation over some time, growth schemes are suitable for you.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh