Growth funds are types of mutual funds that aim at achieving capital appreciation through the investment of funds in growth stocks. Growth funds focus their attention on companies and organisations that are displaying exceptional growth in revenue or earnings instead of companies that pay out dividends. For instance, if an individual invests in 100 units of a mutual fund at Rs.15 per unit and decides to sell it after a year for Rs.20 per unit, the difference of Rs.500 (Rs.20 – Rs.4 x 100 units = Rs.500) will be his / her return on investment, which is basically a capital gain.
The main reason as to why investors put their money in growth funds is because they expect the rapidly-growing companies to continue recording significant growth while increasing in value, thus enabling the fund to experience such benefits as high capital gains. Generally speaking, growth funds can be considered as an increasingly volatile option in comparison with other kinds of funds as they fall more in bear markets and rise more in bull markets than other funds.
Although growth funds have the potential to deliver considerable long-term capital returns, they generally invest in equities, which means that they carry a good amount of risk. Since the value of assets can fluctuate, the risk levels associated with growth funds are somewhat high. Moreover, growth funds do not pay the same amount in dividends as most fixed-income schemes. However, the profits made on growth funds continue to be reinvested in equities, thereby increasing an investor’s portfolio.
Features and Benefits of Growth Funds
- The profits made by an investor on any growth fund will be reinvested in debt / stock so that the individual can earn more money.
- Growth funds are chosen over dividend funds as the money is reinvested into the scheme instead of being returned to the customer.
- Growth funds have the potential to deliver higher returns in comparison with other funds as the units can be sold at a higher Net Asset Value at a later date.
- Growth funds are the ideal solution for those who seek long-term investments as opposed to short-term investment that provide income at various intervals of time.
- Growth funds only provide capital gains and do not pay out interim dividends.
Taxation of Growth Funds
Capital gains are the only profits that are taken into consideration so far as taxation on growth funds is concerned. While equity funds are not exempt from tax on long-term capital gains, short-term capital gains will be taxed at 15%. If an individual avails a growth fund, the rate of tax applicable to the short-term capital gains will be 30%. Long-term capital gains derived from growth funds, on the other hand, will be taxed at 20% with indexation, or at 10% without indexation. In case of dividend funds that provide short-term capital gains, the dividend will be exempt from tax so far as the investor is concerned. However, the fund, prior to the pay out of the dividend, will be required to make a payment towards dividend distribution tax.
GST rate of 18% applicable for all financial services effective July 1, 2017.