Growth funding is a mutual fund that invests in the stocks of businesses predicted to expand their revenue and profits faster than the market or their rivals. Growth funds, unlike value funds, do not often pay big dividends and are more concerned with capital gain than income. It is a sort of investment made by a private equity company, but also by high-net-worth individuals, in exchange for an equity position in unquoted firms that have the potential to develop rapidly.
Should you invest in growth funds?
A fund like the one described earlier might be a good addition to your portfolio if you desire the high-return potential of growth firms but don’t want the risk and labour that comes with studying and picking individual growth corporations.
The fund has an exit load, even though you may abandon it early. Only selling the funds will provide a profit, the difference between selling and buying prices. Go ahead and invest in growth funds if you believe this fits your investing personality. As a result, they are especially enticing to younger investors with a long-term investment in mind.
Growth funding can accelerate growth.
You may accelerate your company’s growth over a two- to four-year period by using growth capital. The need for the usage of expansion capital will differ depending on the kind of company and industry. Nonetheless, most businesses will employ growth capital to expand their operations, enter new markets, create new products, or finance a merger or acquisition.
Most growth capital investors are experts in the industries in which they engage, bringing not just money but also knowledge, skills, and relationships to the table.
Types of Growth Funds
Growth funds may be divided into many categories based on risk and volatility. Growth funds are distinct from value funds in that they are mutual funds. High-potential firms are often included in growth funds, and some of these companies may be ready to hatch while others may take longer. The fund manager’s job is to pick suitable firms and spread the risk, depending on the market scenario.
How Growth Funds Differ from Value Fund?
Stocks that are sold at a lower price than their intrinsic worth are called value funds. Value stocks are, in a nutshell, funds purchased at a discount. The future analysis, which determines the final profit in growth and value funds, is frequent. The analysis in growth funds aims to forecast the future, while the analysis in value funds attempts to forecast the stock’s real value.
Benefits and limitations of growth funds
Benefits
Following are the benefits of growth funds:
Portfolio Diversification
Diversification ensures that the portfolio has a decent variety of stocks. As a consequence, diversification may assist in lowering the investment’s overall volatility. These funds invest in a variety of businesses with the potential to generate high profits.
Risk and Return
A growth fund’s investments in firms are very volatile. As a result, the fund has a high degree of volatility. In addition, the portfolio’s performance is significantly influenced by market circumstances. The fund’s extreme volatility, on the other hand, is counterbalanced by its ability to achieve big profits. They have a fair chance of providing substantial long-term returns to their investors.
Expert fund management
Professionals oversee mutual funds. The team of specialists conducts extensive research to uncover companies with the potential to earn large profits. As a result, buying and selling stocks is not a concern for an investor. To create returns for their clients, the portfolio manager and his team will make all investment choices.
Investment horizon
Equity mutual funds, or growth funds, are mutual funds that invest in stocks. They put their money into equities that have a high degree of volatility. As a result, the funds need a longer investment horizon to deal with the volatility. As a result, these funds are suitable for investors with a five-year investment horizon. The longer the investing period, the lower the volatility and the more likely you will profit.
Tax-efficient
These funds are tax-efficient since they are designed for a long-term investment horizon. They are equity mutual funds; thus, long-term capital gains tax is imposed at a rate of 10%. On an investment kept for more than a year, a 10% long-term capital gains tax is imposed. In addition, the tax only applies if the profits reach INR 1,00,000 in a calendar year. Investors may save money on taxes by investing for the long term.
Limitations
Following are the limitations of growth funds:
Market Volatility
The performance of these funds is affected by the state of the stock market. Market swings make the equities in which the fund invests very volatile. As a result, the fund’s performance may be severely impacted during times of market turmoil.
No dividends
They don’t pay out dividends, interest, or bonuses regularly. Because these funds are only focused on capital growth, they do not pay dividends.
Costs
There is a cost for professional fund management. For professional management services, the asset management organization charges a fee to investors. Choosing funds with a low-cost ratio is usually recommended for investors. A reduced expenditure ratio will aid in the generation of high returns.
Last Words
Growth funds are used to invest in high-risk assets. Invest only if you’re willing to accept big risks. For this reason, it may provide significant yields. It’s not a good idea to invest in it if you’re approaching retirement age. This is a long-term investment. Only invest in growth funds if you are risk-averse and ready to hold your investments for at least 5 to 10 years.
Even if you can quit the fund early, you will be hit with a large exit load. The only way to make money is to sell the funds, and the difference between the sale price and the buy price is your profit. Go ahead and invest in growth funds if you think that’s the correct fit for your financial profile. With the benefit of long-term investing, younger investors find them especially appealing.
