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Figure: Growth funding
Growth funding is a sort of investment made by a private equity firm, but also by high-net-worth individuals, in exchange for an ownership stake in an unquoted company that has the potential to grow rapidly. A growth fund invests in equities of companies that have a good chance of making a profit. The fund’s investors invest solely for capital appreciation. Along with big profits, there are also high hazards. The fund house excludes stocks from companies with substantial dividend payouts while investing. When the market is bullish, this type of fund sees big returns.
Growth funding can accelerate growth.
Companies that use growth funding typically do so to fund a pivotal event in their company’s history. You can potentially accelerate your company’s growth over a two- to the four-year horizon by using growth capital. The need for the usage of expansion capital will differ depending on the type of firm and industry. Nonetheless, most businesses will employ growth capital to expand their operations, enter new markets, develop new products, or possibly fund an acquisition.
Types of growth funds
Growth funding is available in a variety of sectors and markets. Growth funds are one of the most common mutual fund kinds, alongside mix and value funds. Investors commonly discuss the magnitude of market capitalization to break down the variety of growth funds. You can choose from small-cap, mid-cap, and large-cap growth funds. Large-cap funds account for a large portion of the market, whereas small-cap funds account for the smallest.
For individuals looking to diversify their portfolios with international equities, foreign diversified growth funds are popular. A local growth fund, on the other hand, allows investors to promote enterprises in their communities. You might also put your money into a specific local growth fund in a rapidly growing region.
Are there specific technology sectors more likely to secure this type of funding?
Investors are looking for organizations that have the potential to grow in the future. While this varies for each investor, a fair rule of thumb is 20-30% per year (from a higher turnover basis) and above 50% per year (from a lower turnover base) because investors will wish to exit at a pre-determined ROI at some point. The ROI and exit period will vary depending on the investor type and stage of the company’s growth, but most PE growth funds in the technology industry will be looking at a four to seven-year period.
Should you invest in growth funds?
A fund like the one discussed earlier could be a good addition to your portfolio if you desire the high-return potential of growth companies without the risk and work that comes with researching and picking individual growth stocks.
Advantages of growth funding
Due to its potential for capital appreciation, this fund draws a large number of investors. Professional fund managers devote a significant amount of time and effort to discovering and selecting these stocks.
You must understand as an investor that growth funds are for those with higher risk tolerance. However, funds have the potential to expand significantly in the long run.
Stock market turbulence
One of the biggest disadvantages of growth funds is that their equities are extremely volatile, with sharp ups and downs. As a result, it is best suited for risk-averse investors.
If you earn more than Rs 1 lakh and hold the fund for more than a year, you will be subject to a 10% long-term capital gains tax. Nonetheless, they outperform value stock mutual funds in terms of tax efficiency.
Because these funds are subject to a management fee, they will increase your expense ratio. Every year, the AMC will deduct a portion of your profit to pay off the fees.
Expert money management
A growth fund is managed by a group of skilled specialists who discover growth equities for investors. The stock market’s purchasing and selling choices are in the professional hands of fund managers. As a result, your role is reduced to that of a passive investor.
Diversification is aided by a mutual fund that includes a variety of growth stocks. As a result, the overall risk of investing in volatile equities is reduced to some extent.
Disadvantages of growth funding
The disadvantage of a growth fund is that it exposes you to the danger of losing a major chunk of your investment if the markets tumble.
Possible value depreciation
These funds are also highly volatile and prone to losing value. The value of stocks might rise or decline depending on market conditions.
Growth funds may not produce consistent returns in the form of dividends, bonuses, interest, and bonuses, among other things.
If you want to take advantage of a growth fund, you must be willing to commit to the fund for a period of 5 to 10 years. As a result, a growth fund is not for people looking to earn a quick buck in a short amount of time. You can invest in growth funds for long-term capital appreciation if the preceding information matches your investing goals and risk profile. Begin investing right away!