Growth vs. value investing: Which option might suit retail investors in 2025?

Investors often face a fundamental dilemma: chase fast-growing companies with the potential to yield relatively better returns than the market, or pick undervalued businesses poised for a potential turnaround. This debate often frames the “value stocks vs growth stocks” debate, each option bringing different benefits and risks.

For retail investors planning for Financial Year 2025-26, it’s important to recognise how growth-oriented and undervalued stocks function—and how they may fit into your portfolio strategy. In this article, we dissect these concepts, compare their risk-reward profiles, and offer guidance on making balanced choices.

• Table of contents

• Identifying growth vs value stocks
• Contrasting the risk and reward spectrum
• Why growth stocks appeal to investors
• Value stocks: Hidden gems or risky bets?
• Making a suitable choice for your portfolio
• Growth vs value stocks in mutual funds

Identifying growth vs value stocks

Before deciding between growth investing vs value investing, let’s clarify what each category signifies:

• Growth stocks
  • These are stocks of companies that exhibit the potential for robust revenue or earnings growth rates. Such stocks are expected to grow relatively faster than the market. They often trade at premium valuations (eg: high price-to-earnings ratios) because the market anticipates rapid expansion.
  • Companies at the forefront of technology and innovation are often in this category.
• Undervalued stocks
  • Such stocks are those that appear to be trading lower than their intrinsic value, judged by metrics like P/E, price-to-book (P/B), or dividend yield. They may be overlooked or out of favour but hold the potential for future price correction.
  • Some might be older, established businesses going through tough patches or cyclical slowdowns, awaiting catalysts for resurgence.

Thus, the discussion about value stocks vs growth stocks centres on whether investors are willing to buy at a premium for potentially quicker gains or are searching for favourably priced stocks with long-term return potential.

Contrasting the risk and reward spectrum

Risk vs reward in stock investing: Investing in either growth or value typically boils down to trade-offs related to risk, timing, and potential payoff.

• Risk profile
  • Growth stocks
    • Often more volatile, with prices tied to sentiment about future earnings. Any negative news may trigger sharp corrections.
    • Overvaluation risk: If growth doesn’t pan out, stock prices might collapse.
  • Value stocks
    • Short-term returns can be subdued, especially if the stock remains underappreciated longer than expected.
    • Requires thorough knowledge to understand whether the company fundamentals are strong and if the stock is indeed undervalued.
    • However, value investing may be lower risk because they are undervalued, so there’s less room for prices to fall. Moreover, they are less hyped than growth stocks.
• Historical returns
  • Growth-oriented equities sometimes outperform during booming economic cycles, when capital is abundant and sentiment is optimistic.
  • Value picks can perform in recovery phases, where investors hunt for relatively stable cash flows or depressed valuations that bounce back.
• Market cycles
  • Growth stocks flourish in expansionary phases or low-interest environments.
  • Value typically benefits when markets shift from speculation to fundamentals, seeking lower valuations or contrarian plays.

Why growth stocks appeal to investors

It’s not unusual to see growth stocks capturing headlines. Here are their benefits for a retail investor:

• Potential for rapid gains: If a company consistently delivers on growth expectations, its stock value can surge manifold.
• Market visibility: Growth stocks often command media buzz, making it easier for investors to monitor them. Frequent coverage can be a double-edged sword, though, since hype may inflate valuations.
• Innovation and disruption: Growth names often represent cutting-edge technologies or new consumer trends.

Still, buying growth stocks at peak optimism may lock investors into overhyped valuations—which can lead to corrections if future earnings don’t match up.

Value stocks: Hidden gems or risky bets?

In contrast, value stocks are sometimes considered hidden gems. The idea is that the market has overlooked or misunderstood them, thereby pricing them below their "intrinsic value".

• Margin of safety: Purchasing undervalued companies may offer a cushion if the broader market slumps. Their valuations may not drop as drastically because they’re already low to begin with.
• Mean reversion: The expectation is that a mispriced stock could eventually correct if fundamentals stabilise or improve. Once the market re-rates these stocks, the price may surge.
• Value trap risk: Not all undervalued stocks rebound. Some face structural declines, poor management, or outdated product lines. This means you can tie up capital in an underperforming company.
• Less momentum: Value-oriented shares might see little growth for extended periods with minimal price movement until a catalyst—like better earnings or macro changes—sparks renewed interest.

Overall, a well-researched undervalued stock may deliver long-term growth if conditions align, but the path may be slower and require more patience than growth picks.

Making a suitable choice for your portfolio

Deciding on growth stocks vs value stocks depends on several personal factors:

• Risk tolerance: If you can handle large price swings, growth stocks might align better. If lower risk and relatively stable return potential matter more, undervalued stocks may be suitable.
• Investment horizon: Growth stocks can witness big cyclical ups and downs, so a longer timeframe helps ride out corrections. Value might yield modest returns initially but can potentially build wealth over time.
• Market conditions: Assess whether macro trends favour innovative, high-growth industries or if it’s a period where undervalued stocks are likely to rebound.
• Diversification: Blending both approaches can smooth out portfolio volatility, capturing breakout growth stories and cyclical value recoveries simultaneously.
• Research depth: Growth companies often release abundant news, so tracking them can be straightforward. Value investing requires more nuanced analysis to understand the company’s fundamentals vis a vis its current market value.

Growth vs value stocks in mutual funds

While deciding on value investing vs growth investing, you may also examine pooled investment vehicles like mutual funds. Such funds are professionally managed, with investment experts handling stock selection. Depending on their strategy and outlook, fund managers may blend growth and value approaches, distributing your exposure across multiple stocks. This layered diversification may reduce risk and the professional management reduces the need for you to pick and track individual shares. Ultimately, whether you lean toward growth or favour undervalued opportunities, staying disciplined, performing diligent research, and aligning your choices with personal risk tolerance remain important for potential success.

FAQs:

What is the difference between growth and value stocks?

Growth stocks exhibit the potential for relatively faster growth than their peers and command premium valuations, whereas value stocks trade at lower prices than intrinsic value. They can be seen as bargains if fundamentals improve. Growth stocks thrive on optimism about future earnings; value stocks rely on mispricing corrections.

Are value stocks a suitable investment?

Value stocks may potentially yield returns in the long term if you identify fundamentally solid companies temporarily out of favour. However, while some undervalued stocks rebound, others may remain stagnated (“value traps”) due to persistent problems. Thorough research is crucial before investing.

Why do some investors prefer growth stocks?

Many are drawn to the potential for returns in the near term if a company’s growth forecast holds up. Growth stocks can also benefit from strong news flow, robust brand presence, and market attention, appealing to those pursuing market outperformance.

Can value stocks outperform growth stocks?

Yes. At times—especially in certain market cycles—undervalued stocks may rally when investors rotate into lower priced shares or when improving fundamentals spark a re-rating.

Should I invest in both growth and value stocks?

Balancing both can mitigate risk and exploit varied market conditions. Growth picks may surge in buoyant phases, while undervalued names often catch up later or offer stability if markets turn choppy.

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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.