- What is growth investing?
- What are growth stocks?
- Characteristics of a growth stock
- What should you look for before investing in growth stocks?
- Why should you invest in growth stocks?
- Alternatives to Investing in growth stocks
What is Growth Investing?Growth investing focuses on investing in companies which are growing rapidly. Companies from sectors like Bio-technology and IT generally grow faster than other companies. Investing in companies which are growing their sales or profits rapidly is known as growth investing.
What are Growth Stocks?Growth stocks are stocks that have high growth potential. These stocks are expected to grow faster than the average growth of the market. They can also lead to massive wealth creation over time. Growth stocks have the potential to earn above average returns because they have these characteristics:
- The stock belongs to a booming industry.
- The stock has a competitive advantage which justifies its potential to grow. This competitive advantage can be a new product, future expansion plans, monopoly, etc.
- The company has come up with an innovative strategy and has made technological advancements.
Characteristics of a Growth Stock
1. Growth stocks are valued at a premiumGrowth stocks are valued at a premium because they provide higher returns than their peers. Hence, the stock has a highp rice to earnings (PE) ratio and a high price to book (PB) ratio. Both of these ratios evaluate the valuation of a company’s stock. A high PE shows that investors are willing to pay a higher price to buy the share because of rapid future growth expectations.
2. Growth stocks rarely pay dividendsGrowth companies either pay low to no dividends. It is because these companies have a motive to grow at a fast pace. Hence, they prefer investing their profits back into the business to earn extra profits. As the company starts to grow the investors get returns in form of capital appreciation of share. For example, the dividend yield of Avenue Supermarts is 0%. It means they prefer to reinvest their earnings back in the business.
3. Growth stocks have a competitive advantageGrowth companies usually have a unique selling proposition (USP) which attracts a large customer base. Apart from this, the company also has a competitive advantage over its peers. Hence, they grow better than others in the same industry.
4. Growth stocks have a high risk and reward ratioInvestments always have some amount of risk and so does growth stocks. As the stock pays low or no dividends…the investor’s only profit is the capital appreciation in the long term. So if the company performs well in the future that’s when the investors will make profits. Hence, these companies are a bit riskier than stable companies with average growth rate.
5. Growth stocks have a loyal and growing customer baseSince growth companies have a moat of their own, they tend to have a huge and growing customer base.
What should you look for before investing in growth stocks?
1. Rising Revenue and Operating Income MarginsRevenue growth and operating margins are the two most important factors which will help you analyse a company better.
- Revenue is the total income generated by a company.
- Operating income is the company’s gross profit recorded in the income statement.
2. The pace of net profits over a long termNet profit is the total profit of the company after operating costs, taxes, interest and depreciation has been deducted. Consistent growth in net profit indicates the success of a business. For example in the last 5 years, Britannia has seen fast growth in its net profits by 20.3%
3. Increasing Return on Equity (ROE) and Return on Capital Employed (ROCE)
- Return on equity (ROE) refers to the profits generated on equity capital.
- Return on capital employed (ROCE) refers to how efficiently a company utilizes the available capital to generate additional profits.
4. Earnings per share (EPS)EPS is the net income earned for every outstanding share. A high EPS means that the investment is worthwhile. As the share price rises, the EPS also tends to rise. However, you must check for earnings growth of the past 5 years and check for consistent returns. If a company is providing consistently good returns, then the stock is worth investing.
5. Look for booming sectorsIf you want to invest in growth stocks watch out for sectors which can be future game changers. Investing in stocks from booming sectors can help you create massive wealth overtime.
Check out our video on how you identify the best growth stocks to buy in Indiahttps://youtu.be/nQ9rtG6NhK0
Why Should You Invest in Growth Stocks?
1. High returnsInvesting in the best growth stocks can help you earn high returns over time. These companies focus on expanding their business to generate revenue. The investors who invest in these stocks can earn a substantially huge capital gain in the long term. But high returns come by taking a high risk and growth stocks are one of a kind. These stocks are more sensitive to market volatility in the short term. Hence, it is recommended to invest for the long term.
2. Hedge against inflationReturns earned by investing in the best growth stocks is comparatively higher than the average returns provided by other stocks. So, it’s safe to hold a few growth stocks in your portfolio. By doing so you will be able to earn good returns in a diversified manner.
Alternatives to Investing in Growth Stocks
Growth Mutual FundsGrowth mutual funds primarily invest in growth stocks with the aim to achieve maximum capital appreciation. The companies selected in the growth funds are the one which has a proven track record of generating high revenue.
List of Best Growth Mutual Funds
|Funds||Rating||6 months||1 Year||3 Years||5 Years||AUM (in Rs cr)||Expense Ratio|
|Axis Focused 25 Fund Regular Growth||5||26.16%||70.01%||14.58%||17.58%||14,698.83||1.71%|
|Parag Parikh Flexi Cap Fund- Regular Plan-Growth||5||21.50%||87.56%||19.72%||18.01%||7,451.88||1.86%|
|Motilal Oswal Flexi Cap Fund - Regular Growth||5||22.94%||71.70%||6.56%||13.97%||11,816.15||1.73%|
|Axis Bluechip Fund - Regular Growth||5||22.97%||57.22%||16.49%||16.56%||23,496.02||1.83%|
|Franklin India Opportunities Fund-growth||5||35.55%||98.06%||11.77%||13.61%||1,795.16||2.51%|
|Uti Flexi Cap Fund-regular Plan-growth||5||33.55%||91.83%||18.50%||17.30%||15,746.26||1.75%|
|Motilal Oswal Focused 25 Fund - Regular Growth||5||25.50%||67.64%||13.22%||15.29%||1,585.85||2.12%|
|Axis Flexi Cap Fund Regular Plan-Growth||5||24.66%||57.35%||15.96%||-||7,459.86||1.8%|
|Icici Prudential Us Bluechip Equity Fund - Growth||5||25.02%||53.78%||22.45%||17.76%||151.74||2.37%|