The maxim that "high risk, great return" applies to growth funds might make them attractive options for investors who are not planning to retire shortly. Investors often require a level of comfort with risk and the ability to maintain a holding period with a time horizon of five to 10 years. The price-to-earnings (P/E) and price-to-sales (P/S) multiples of the holdings of growth funds are sometimes rather high. The above-average improvements in sales and profits that these firms create are the compensation investors get for making this trade-off.
Different Categories of Growth Funds
One of the primary categories of mutual funds and exchange-traded funds is growth funds. Other primary categories include value funds and mix funds (ETFs). They have greater swings in value than funds classified as value or mix. Growth funds are often subdivided into small-cap, mid-cap, and large-cap funds, with funds reflecting each of these three market capitalization categories. Large-cap growth mutual funds are among the most popular mutual funds and account for a significant portion of the overall market share. Large-blend funds are also quite popular among investors since they provide value and growth for their capital. Overseas large-cap growth funds are substantially farther down the rankings in terms of market share.
The Characteristics and Advantages of Growth Funds
The Possibility of Significant Profits
Because of the possibility of increased value, many investors are interested in purchasing shares in this fund. The process of locating and selecting these stocks requires a significant amount of time and effort from professional fund managers.
Determinants of Risk
As an investor, you need to be aware that growth funds are intended for those who can tolerate a higher level of risk. On the other hand, funds have the potential to see significant growth throughout a lengthy period.
Stock Volatility
One of the most significant drawbacks of growth funds is their high level of volatility, which manifests itself in the form of equities that experience abrupt increases and decreases in value. For this reason, it is most appropriate for investors with a strong tolerance for risk.
Tax-Efficiency
If a growth fund's earnings are more than Rs. 1 lakh and kept for more than a year, the fund is subject to the long-term capital gains tax, sometimes known as the LTCG tax. Despite this, they have a lower overall tax burden than value stock mutual funds.
Additional Costs Incurred
These funds are subject to a management fee, which means the overall expense ratio of your portfolio will increase as a direct result. In addition, the AMC will make use of a portion of your annual earnings to pay off any outstanding expenses.
Expert Money Management
A growth fund is managed by a group of knowledgeable industry experts who research and choose companies with strong growth potential on behalf of the investors. The decisions regarding the purchase and sale of stocks are entrusted to the knowledgeable hands of the fund managers. Your involvement will thus be reduced to that of a passive investor due to this development.
A Diversified Portfolio
A mutual fund's portfolio may benefit from increased diversity if it has a variety of growth companies. As a result, it lowers the total risk associated with the largest growth fund. The Growth Fund of America (AGTHX), which American Funds manage, is considered one of the most prominent growth funds. Despite the volatility in the market, this mutual fund has over $253 billion in assets under management (AUM) as of March 2022, and the stock price has increased by 10 percent over the last year. As of the 28th of February in 2022, the fund has generated an annual return of 14.28 percent on average during the last ten years.
The Growth Fund of America's biggest investment is in Tesla, accounting for 7.1 percent of the fund's total assets. With a weight of 34.9 percent, the technology sector is the one that carries the most importance. Stocks in consumer discretionary companies come in a close second, accounting for 24.3 percent of total assets. Growth funds often hold a significant portion of their assets in technology companies. Technology companies fulfill all of the requirements for growth funds thanks to their strong growth rate and high P/E and P/S ratios.
The Results Obtained By Growth Funds
Over the last ten years, growth funds have comprised most of the top-performing large-company stock funds. For instance, the Morgan Stanley Multi Cap Growth A (CPOAX) fund has generated an annualized return of 23.3 percent over the last ten years, making it the highest performing large-company stock fund. At the moment, Snowflake, Inc. (SNOW), Cloudflare, Inc. (NET), and The Trade Desk are the three largest assets the company has (TTD).
