Who doesn’t dream of skyrocketing capital appreciation that could make us financial superstars? While your dream of becoming a financial superstar would be process-driven and long-term, you could use growth funds to appreciate your wealth like never before.
Wondering what a growth fund is or what a growth plan in a mutual fund is? In this article, we’ll look at the types of growth funds offered in India. Without wasting any time, let’s explore what is growth plan in mutual fund?
What is Growth Fund?
A mutual fund scheme that primarily invests in company shares or stocks is called an equity fund (also called Growth Funds). These are usually the companies that have a strong record of earnings and revenues over sustained periods. A growth fund offers an unprecedented scope for wealth creation over a sustained time horizon.
How do Growth Funds Work?
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Let us understand the workings of growth funds in India.
This kind of investment may contain stocks that expand faster than their counterparts. For instance, a tech business projected to expand at an 8% pace over the next five years would be eligible for inclusion in a growth fund if the average tech stock is now forecast to grow at an estimated 4% annual rate of earnings per share over that time.
With growth funds, there’s an additional risk component to consider. Even though a firm is currently trading at a substantially greater growth rate, this does not guarantee that it will be able to maintain that growth pace for the next five years. The stocks will suffer if growth slows down for any reason—a broad market slump or a failed product.
Types of Growth Funds
Having clarified what a growth fund is, let’s explore the types of best growth mutual funds in India.
1. Small Cap Growth Funds
As has been witnessed in India’s stock market in recent years, small is the new big factor in India’s investing scenario. As the name suggests, small-cap growth stock mutual funds invest in emerging small-cap companies with solid financials likely to display accelerating growth in the future.
The small-cap category usually experiences high volatility, but the growth potential on offer is also high. Identifying and trusting the next generation of leaders is a challenging task. These small growth funds come to your rescue here.
2. Mid-Cap Growth Funds
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Mid-sized companies are the ones that have proven business models but also have a tremendous amount of headroom to undergo rapid expansion in the future. You should go in for mid-cap mutual funds if you are ready to stay invested for a longer investing horizon.
3. Large Cap Growth Funds
Large businesses have attained steady cash flows and have continuously surpassed the broader market’s earnings. Investing in large-cap companies can provide the stable growth component you have always vouched for in your portfolio.
4. Multi/ Flexi Cap Growth Funds
As the name suggests, multi-cap or flexi-cap funds invest in companies across the market capitalisation spectrum. If you are not ready to go in for funds that restrict themselves to a particular category of companies, you should prefer these flexi-cap funds. These funds offer superior growth prospects over a sustained period.
One of the most significant benefits of investing in high growth mutual funds located across a diverse market capitalisation spectrum is the high degree of diversification that is usually difficult to find in other categories of funds.
5. Thematic Growth Funds
Thematic growth funds limit their investments to high-growth themes such as technology, infrastructure, banking, and green energy. Usually aligned with the existing government’s preferences and the market’s broader mood, these funds outperform the markets in growth.
If you believe your beliefs on the tactical shifts in the Indian economy are right, you can invest in such thematic growth funds without a second thought. You could also seek professional expertise as per your requirements.
6. ELSS Growth Funds
Equity-linked growth funds, otherwise known as equity-linked savings schemes, are mutual funds that focus on a stock with great growth potential and can yield substantial returns over long periods. These funds also offer tax benefits under Section 80C of the Income Tax Act 1961.
Benefits of Growth Funds
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Let us have a look at the benefits of investing in top growth mutual funds.
1. Professional Portfolio Management
Fund managers possess the necessary tools to conduct an in-depth analysis of the existing market trends and identify the stocks that can align perfectly with them. This expertise could help you attain the desired growth goals.
2. Partnering Country’s Economic Growth
Through these funds, one can really make investments in sectors and businesses best positioned to benefit from the country’s future growth potential.
3. Exceeding Market Performance
Growth funds usually exceed market performance in the long term. They offer the right bet for you to relax and breathe free.
4. Reaping the Benefits of Diversification
You further benefit from built-in diversification by getting opportunities to invest in companies of varying market capitalisations—often hard to achieve through individual security selection.
Conclusion
Growth funds pool investors’ money to invest in companies or sectors with high growth potential. The fund managers carefully study the financial data to select only those stocks that are likely to perform better than the market in the medium to long run. One common trend that has emerged is that companies with a comparative advantage are selected at the expense of their rivals.
FAQs
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What are growth funds?
Growth funds are mutual funds that invest in the stocks of fast-growing companies. Their focus is on generating capital appreciation over the long term.
How do growth funds work?
Fund managers actively manage the portfolio of growth funds by investing the corpus in the stocks of companies (located across market caps ) with strong, high earnings potential.
What returns do growth funds provide?
Growth funds can provide higher returns than broader markets in the long run of over 7-10 years. But there might be periods, especially in the short term when returns are volatile or negative.
What are the risks of investing in growth funds?
Being equity-oriented, growth funds carry the risks of volatility and fluctuations in the stock market. They may underperform during economic downturns.
References:
https://www.investopedia.com/terms/g/growthfund.asp
https://www.bajajfinserv.in/investments/what-is-a-growth-fund
https://www.angelone.in/knowledge-center/mutual-funds/what-are-growth-mutual-funds
https://www.godigit.com/finance/investments/growth-mutual-funds
