Growth Funds vs. Value Funds: Understanding the Difference
Growth and value are two distinct investment strategies that fund managers can follow for equity mutual funds. Understanding the differences between them can help investors align their investments with their financial goals and risk tolerance.
Let’s take a closer look at the concepts of growth funds and value funds to understand the key differences between the two.
- Table of contents
- What are growth funds?
- What are value funds?
- Key differences to know between growth funds and value funds
- What to know before investing
- FAQs
What are growth funds?
Mutual funds following a growth strategy invest in the stocks of companies expected to perform better than their peers in the market. These growth funds target companies with the potential for above-average growth. However, because these companies reinvest their earnings to fuel growth, dividends are usually minimal or non-existent.
What are value funds?
Value funds focus on companies that are undervalued in the market. These mutual funds focus on stocks that are selling at a price lower than their inherent value. The belief is that the market will eventually recognise the true value of these companies, leading to potential gains for investors. Value funds tend to invest in more mature companies, and unlike growth funds, they may invest in companies that offer regular dividends.
Key differences to know between growth funds and value funds
The main difference between growth and value funds lies in their investment strategy and target companies.
Investment approach – growth fund vs value fund
Growth funds seek aggressive potential capital appreciation by investing in high-growth companies, aiming to potentially benefit from the future success of these enterprises. They largely focus on sectors that are likely to expand, such as technology and renewable energy, in which innovation drives earnings.
On the other hand, value funds concentrate on acquiring securities at a discount, picking established companies that may be temporarily undervalued – due to some setbacks or negative publicity – but have strong fundamentals. This strategy often involves a detailed analysis of financial statements to identify undervalued opportunities.
Risk/return – Growth fund vs value fund
Both investment strategies entail high risk, but growth funds tend to be more volatile because of their focus on expanding companies and sectors undergoing rapid change.
The choice between growth and value funds should include a consideration of the investor's risk tolerance, investment horizon, and market outlook, balancing the potential for growth with the relative stability of undervalued assets.
What to know before investing
- Risk tolerance: Growth funds can be suitable for those willing to tolerate relatively higher volatility for higher return potential, while value funds may be better for investors with a slightly lower risk appetite.
- Investment horizon: A long investment horizon of around 10 years is recommended for equity mutual funds because stock markets tend to be more volatile in the short term and a long horizon gives investors more time to ride out market cycles and fluctuations.
- Market conditions: Be aware of current market trends. Sometimes, growth stocks outperform in a bullish market, while value stocks may do relatively better in a bearish or volatile market.
- Diversification: Combining both growth and value funds in your portfolio can provide a balance between risk and potential return.
Conclusion
Understanding the fundamental difference between growth and value funds is crucial for making informed investment decisions. While growth funds focus on companies with high potential for future earnings, value funds seek out undervalued stocks with the expectation of a market correction.
FAQs:
What is the main difference between a growth fund and a value fund?
The main difference between the two types of funds is their investment strategy. Growth funds target companies with a high potential for future earnings growth, aiming for long-term capital appreciation. Value funds invest in undervalued companies, focusing on stocks that are priced below their intrinsic value.
Which is riskier, a growth fund or a value fund?
Both are high-risk avenues, but growth funds can be relatively riskier due to their focus on high-growth sectors, which are more volatile. Value funds might offer relatively more stability as they invest in fundamentally strong companies.
How should I choose between a growth fund and a value fund?
Your choice should be based on your risk tolerance, investment goals, and horizon. Growth funds may offer higher potential returns in the right market conditions but also come with higher volatility, while value funds may provide more stability in relative terms but potentially lower returns. Diversifying your portfolio with both types of funds can also be a balanced approach.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.