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By Dipesh Ghimire

Why Invest in Growth Stocks?

Why Invest in Growth Stocks?

What Are Growth Stocks?

Growth stocks are shares of companies with earnings and growth rates significantly higher than the market average. These companies are usually in the expansion phase, reinvesting their profits to drive future growth rather than distributing dividends to shareholders.

Why Invest in Growth Stocks?

  1. Higher Capital Growth Potential: Growth stocks can deliver substantial returns in both the short and long term compared to other stock categories.

  2. Rapid Business Expansion: These companies have the capability to expand much faster than the industry average.

  3. Wealth Creation: Investing in top-performing growth stocks can significantly multiply your wealth over time.

  4. Beating Inflation: Growth stocks often offer returns that outpace inflation, ensuring real value appreciation.

  5. Long-Term Benefits: Through compounding, growth stocks can double your capital under favorable market conditions.

Investment Process

  1. Financial Performance: Focus on companies with consistently high returns and strong fundamentals, such as a 5-year average return on capital employed (ROCE) exceeding 19%.

  2. Sales and Profit Growth: Look for companies with more than 9% sales growth and 14% profit growth.

  3. Additional Criteria:

    • Market Capitalization: Above ₹1,000 crore.

    • Public Ownership: Less than 25%.

    • Institutional Investment: At least 1% owned by Foreign Institutional Investors (FII) or Domestic Institutional Investors (DII).

    • Debt-to-Equity Ratio: Less than 0.5.

Conclusion

Growth stocks are a highly attractive option for long-term investors. However, it is essential to conduct thorough research and ensure your financial goals and risk tolerance align with the investment before making a decision.

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