A growth fund is a mutual fund which invests in the stocks of the companies which are expected to grow at a rate faster than the overall stock market. The primary goal of growth funds is capital appreciation. They do not seek to invest in the stocks of the companies which have high-dividend payouts (this is the prime focus of dividend-yield funds). Nor do they go after value stocks – companies which have relatively undiscovered potential.
Growth funds are capable of giving investors significantly high returns in a bullish market. However, growth funds may result in losses during bearish market conditions. Thus, growth funds come with a relatively high amount of risk.
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Features of Growth Fund
- High Returns: Growth funds invest in high-growth stocks. These are typically the companies which are growing faster than the market and which are rapidly growing their earnings.
- Ideal for Medium Investment Horizon: Growth funds are an ideal investment instrument for investors who want to invest their money for a medium to long term (more than 3 years). Investors willing to remain invested for an even longer tenure (more than 5-7 years) should ideally choose value funds.
- High Risk: Growth funds are a high-risk investment instrument as their performance heavily depends on volatile stock market conditions.
Growth Funds Vs Growth Option Of Mutual Funds
All mutual funds come in 2 variants – growth and dividend. The growth option gives returns in the form of rising values of mutual fund units. In tax terms, this translates into long term capital gains and short term capital gains. The dividend option gives returns by paying periodic dividends. In tax terms, this translates to dividend income.
Growth funds are different from the growth option of mutual funds. While growth option is a variant of a mutual fund plan, growth fund is a type of mutual funds. Thus, like other mutual funds, growth funds also come in 2 variants – growth and dividend.
Growth Funds v/s Value Funds v/s Dividend-Yielding Funds
Growth Funds: These funds invest in stocks of companies which are growing rapidly and outpacing the market.
Value Funds: These funds invest in the stocks of relatively undiscovered companies which have the potential of growing in value in the near future.
Dividend-Yielding Funds: These funds invest in stocks of companies which are capable of providing high dividends at regular intervals.
Who Should Invest In Growth Funds?
Investors who are willing to bear a moderately high amount of risk for high returns and who do not wish to get involved in the researching and selection of stocks should ideally invest in growth funds. It is an ideal investment option for investors with medium term investment horizon.
Growth Funds Taxation
Growth funds generate returns more in the form of capital gains than dividends because fast growing companies tend to pay relatively low dividends. Capital Gains and dividends are taxed differently and during long term capital gains taxation in mutual funds becomes more favourable than taxation rules applicable to mutual fund dividends.
Dividends are subject to a 10% Dividend Distribution Tax (DDT) regardless of holding period. With respect to capital gains tax, the short-term capital gains tax on equity funds is 15% and the long-term capital gains tax on equity funds is 10%. However, long-term capital gains on equity mutual funds are also exempt up to Rs. 1 lakh per annum (this exemption is not available for dividends).
Also Read: Taxation of Mutual Funds