What Are Growth Mutual Funds?

What Are Growth Mutual Funds?

Growth mutual funds are those types of mutual funds which mainly invest in companies having the ability to earn more and grow. Instead of providing dividends to the investors, the gains made by the investments in the fund are again invested in the fund itself. The purpose is to make the NAV increase over the period of time through capital appreciation.

Growth mutual funds are dependent upon the securities and market. When the goal of the investors is to create wealth and not receive income, they opt for growth mutual funds.

Characteristics of Growth Mutual Funds

The best growth mutual funds have several features that distinguish them from other mutual fund categories.

• Capital Appreciation: The main goal is the appreciation of the capital that is generated through investments in companies that have growth prospects.
• Reinvestment of Profits: Profits are reinvested in the scheme itself instead of distributing them to the investors, which helps the compounding process.
• Professional Fund Management: There are professional fund managers who make decisions regarding investing according to the investment goal of the scheme and market conditions. 
• Diversified Portfolio: The portfolio is well diversified as investments are made in different companies and sectors, which means that even the bad performance of a single stock will not be an issue.
• Market Performance: The returns are linked to the market performance, as there can be gains or losses depending on the performance of the underlying stocks.
• Appropriate Investment Schemes for Long-Term Investors: This is because they suit investors with a long-term investment horizon.

Types of Growth Mutual Funds

Growth mutual funds are available in different categories based on the companies and sectors in which they invest.

Large-Cap Growth Funds

Large-cap growth funds mainly invest in well-established companies with large market capitalisation. These companies generally have stable business operations and established market positions.

Mid-Cap Growth Mutual Funds

Mid-cap mutual funds usually invest in medium size companies that have the potential of growing at a faster rate compared to large size companies but at a higher level of market risk.

Small-Cap Growth Mutual Funds

Small-cap growth mutual funds are invested in small size companies that are at the growth stage. The price of these stocks tends to be highly volatile due to market changes. 

Multi-Cap Growth Mutual Funds

Multi-Cap growth mutual funds are involved in investments made in large cap, mid-cap and small cap firms.

Thematic Growth Funds

Thematic growth funds invest in companies linked to a particular investment theme, such as technology, healthcare, infrastructure, or manufacturing. Their performance depends largely on the selected theme and related sectors.

How Do Growth Mutual Funds Work?

Growth mutual funds pool together the savings of several individuals and invest them in an array of investment vehicles, all linked to the stock market. Each individual's share of the portfolio will be represented in units of which the price is determined by the Net Asset Value (NAV) of the fund.

As the value of the underlying investments fluctuates, so does the NAV. As profits are not distributed but retained in the scheme, the NAV will tend to go up if the portfolio performs well.

Example:

Suppose an investor invests ₹50,000 in a growth mutual fund when the NAV is ₹25.

• Investment amount = ₹50,000
• NAV = ₹25
• Units allotted = 2,000 units

After a few years, if the NAV increases to ₹35, the investment value becomes:

2,000 × ₹35 = ₹70,000

The increase in investment value is due to the appreciation in the NAV, while the number of units remains unchanged.

Benefits of Investing in Growth Mutual Funds

Growth mutual funds offer several features that may suit investors looking for long-term capital appreciation.

• Opportunity for Long-Term Capital Growth: Such funds try to appreciate investments over time with the growth in the underlying portfolio.
• Advantage of Compound Growth: Because of the reinvestment of earnings in the fund itself, investors can benefit from compound growth.
• Professional Management of Fund: The management of the fund takes care of the prevailing market situation and decides on investment accordingly.
• Multiple Investments: Multiple companies or sectors are invested in by such growth mutual funds. 
• Ideal for Long-Term Objectives: The funds can be used for retirement plans, further education, or wealth creation over a period of time. 
• Easy-to-Manage Investment Options: The investor can choose to invest via Systematic Investment Plan (SIP) or lump sum investments.

Risks of Growth Mutual Funds

Like all market-linked investments, growth mutual funds are subject to certain risks.

• Market Risk: The value of the fund might increase or decrease depending on market conditions.
• Risk of Volatility: Mid cap, small cap, and thematic funds could have greater price movements compared to a diversified large cap fund.
• Sector Concentration Risk: Thematic growth funds may be impacted if the sector or theme does not perform well.
• Economic Risk: Economic factors such as inflation, interest rate, government policy, and economic environment might impact the fund’s performance.
• Risk of Liquidity: Some of the securities that are held in the portfolio may not be easily tradable at certain times.

Growth Funds vs Dividend Funds

The following highlights the difference between growth vs dividend fund:

Tax on Growth Mutual Funds in India

The taxation of growth mutual funds depends on the type of mutual fund and the holding period at the time of redemption.

*Tax treatment is subject to the prevailing income tax rules and applicable surcharge and cess.

How to Invest in Growth Mutual Funds

Investing in growth mutual funds involves a few simple steps.

• Define your financial goals and investment horizon.
• Select a growth mutual fund that matches your investment objective and risk profile.
• Complete the required KYC formalities.
• Open an investment account through a mutual fund platform or registered intermediary.
• Choose between a SIP or lump sum investment.
• Monitor your investment periodically and review it based on your financial goals.

SIP vs Lump Sum Investment

Both SIP and lump sum investments allow investors to invest in growth mutual funds, but they differ in the investment approach.

Conclusion

Growth mutual funds focus on long-term capital appreciation by reinvesting the earnings generated by the portfolio. They may suit investors who are comfortable with market fluctuations and have a longer investment horizon. Before investing, it is important to understand the fund's objective, investment strategy, risk level, and tax implications. Evaluating these factors can help investors choose a growth mutual fund that aligns with their financial goals.