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Normally, growth investing and value investing are seen as two opposite sides of investment strategy, although it may not always be true. Here is a quick difference between a growth investing approach and a value investing approach. Growth funds are normally the diversified equity funds that are in contrast to the value funds. These growth funds typically identify stocks that have high growth potential even if the stock prices and the valuations are relatively steep. The assumption is that the growth in earnings and revenues can more than make up for the relatively higher valuations of these stocks.
Are growth fund riskier than value funds? There are not hard and fast answers to this question. What we can infer is that growth stocks tend to be better bets in the short to medium term but don’t give multi-bagger returns in the long run. However, value stocks may not really flatter in the short to medium term but if identified with appropriate strategy and effort, it has the potential to create multi-baggers over the long run i.e. a holding period of more than 5-7 years.
Investors often get confused between a growth option of a mutual fund and a growth fund. Here are some basic differences between the two.
Till now we have laterally discussed the concept of growth fund quite elaborately. Let us now look at the definition of a growth fund from the mutual fund investor perspective. Growth funds typically invest in the stocks of companies which offer promising returns due to being in a high growth industry and having delivered high growth in the past. Investors invest in the fund with the only goal of achieving capital appreciation.
Relative to value funds, the risk element is lower in growth funds as growth and momentum is in favour of these funds in the short to medium term. Along with high returns, the risks are fairly high, although it is lower than a value fund. While investing, the growth funds typically eliminate stocks of companies that have high dividend pay-out ratios. They prefer stocks that reinvest most of the profit within the company. Growth funds normally experience high returns when the market is bullish but underperform in bearish markets.
Here are some of the key features pertaining to growth funds.
These are the investors best suited to invest in growth funds.
In short, growth funds are a high risk option although they can give returns like high beta stocks. But they also carry the risk of high beta stocks in that they can underperform the market during bear market conditions. This makes the growth fund intrinsically volatile and best suited to investors with a higher risk appetite, longer staying power and the ability to take losses in their stride.
The table below captures the gist of how growth funds are taxed. Since growth funds are essentially equity funds, they will be taxed as equity funds. Here is the tax treatment of growth funds.
Taxation Point | Growth Mutual Funds |
---|---|
Classification of LTCG | They are classified as equity funds so more than 1 year holding becomes LTCG and less than 1 year is STCG |
Taxation of LTCG (Long term capital gains) | Since they are classified as equity, LTCG is tax free up to Rs.1 lakh per annum. Above that it is taxed at 10% flat, without indexation benefit. |
Taxation of STCG (Short term capital gains) | Since they are classified as equity, STCG is taxable at a concessional rate of 15% on the gains made |
In addition to the above, short term losses on growth funds can be set off against short term gains and long term gains. However, long term losses can only be set off against long term gains. Such losses, if unabsorbed, can also be carried forward for a period of 8 assessment years.
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