People invest in mutual funds for various reasons – that could be to create wealth or to fulfil long-term financial goals. Mutual fund investment is subject to market risks, and it all depends on investors risk-taking ability. If you’re investing in equity funds – you can choose either the growth or the dividend option. In this article, let’s discuss the growth option.
The risks associated with mutual funds vary depending on the type of fund you choose. Equity funds are highly risky as compared to debt fund, but the returns from the former are high. Talking about the equity funds, investors can either opt for growth or dividend option under this. Let’s understand the growth fund in detail.
Growth fund invests in stocks of companies which offer promising returns. Investors invest in the fund with the only goal of achieving capital appreciation. Along with high returns, the risks are also high. While investing, the fund house eliminates the stocks of companies with high dividend payouts. This type of fund experience high returns when the market is bullish (condition when the stocks market is rising or expected to rise)
Risk factor: The fund is highly risky, and it is only suitable for investors who have a high-risk appetite. However, once you invest in it, the returns are promising
Volatile fund: If you are investing in growth stocks, you should be ready to face market volatility. Stocks tend to rise and drop as they are market-linked financial instruments
High returns: Many experts swear by the fund’s capital appreciation feature, which is why it majorly attracts the attention of investors. High returns are guaranteed knowing the fact that all stocks are hand-picked by professional fund managers
Expert management: The selection of growth stocks is a work of precision. Expert money managers identify these stocks. The managers are also responsible for buying and selling decisions
Diversification: A growth fund portfolio is made up of a mix of stocks of fast-paced companies that provide you with the benefit of diversification. This helps to reduce volatility to some extent.
Commitment: Growth funds require long-term investment commitment that could range from 5 years to 10 years.
No dividend: The fund does not pay dividends as they only focus on capital appreciation.
Reinvestment: Many investors prefer growth funds as opposed to the dividend fund because the money is again reinvested in the scheme instead of being returned so that they can earn more.
Risk-embracing and aggressive investors who are looking for fast-pace returns
Investors with a long-term investment horizon
Investors who do not mind losing their investment amount in the face of market risks
If you’re close to your retirement age, then growth funds are not ideal for you
A young investor with a long-term commitment and having surplus money can invest in a growth fund
Growth option is often compared with dividend option when it comes to equity mutual funds. Both these options serve a different purpose, and it all comes down to carefully analyzing your cashflow needs. For instance, if you’re looking for regular income generation and low-risk funds, then dividend funds are the best. In either case, if you want to invest for a longer period and get the compounding benefit, growth fund is an ideal choice.
Growth funds are subject to capital gains tax. The short-term gains tax on growth equity funds is applicable at the rate of 15%, while the long-term capital gains tax is applicable at the rate of 10%. However, long-term capital gains tax for equity mutual funds attract 10% tax if earnings exceed Rs. 1 lakh per annum or you hold them for more than a year.