Growth investing and value investing are two concepts followed by mutual fund managers and investors as well. If you are an investor and wondering whether to pick the growth funds or the value funds, here are certain aspects of both types of funds which you can consider.
Growth investing in Mutual funds
When a fund manager follows a growth investment strategy, they are picking up stocks with higher growth potential than the average growth for these funds. So, these funds invest in stocks of such companies which are growing faster than their peers or have certain strategic benefits which their peers don’t have. It may be the scale of the business or some patents, regulations in favour of the business, or any technology that has been developed by them which is helping the business grow multi-fold and others. The underlying companies of these funds look costly when considering metrics such as price-to-earnings or price-to-book ratios. Also, they reinvest their profits to fuel the company’s growth rather than paying dividends. Also, read our blog How to choose the right mutual fund for you? to get more insights.
Value investing in mutual funds
Value investing, on the other hand, refers to another type of investment strategy for mutual funds where the fund’s assets are invested into stocks of such companies which are undervalued. So, these funds pick the stocks based on the difference between their intrinsic value or fair value and the market price if the market price is lower than the fair value. The fund provides positive returns when underlying stock market prices move towards fair value. Read more here Why are Mutual Funds becoming so Relevant in Today’s Scenario?
We can also see that these companies pay dividends to their investors, the fund house in this scenario. However, it is up to the fund manager to offer dividends to the mutual fund investors.
Value Funds Vs. Growth Funds
| Basis | Value Funds | Growth Funds |
|---|---|---|
| PE Ratio | These funds invest in stocks of such companies which have lower PE ratios. This is because the market price of the stock is lower than its intrinsic value. | The PE ratio of the underlying stocks of Growth funds tends to be on the higher side as the underlying stocks are overachievers in the market. |
| Price | Value funds invest in companies whose stocks are currently undervalued. | Growth funds invest in companies whose stocks are presently overvalued. |
| Risk | The risk associated with value funds is lower than growth funds as these funds typically invest in stocks of large and well-established companies. | Growth Funds carry higher risks than value funds as these funds invest in companies that have the potential to reward investors with high gains but also come with higher risks. These companies are relatively new to the market. |
| Dividend yield | Value funds invest in stocks which have high dividend yields. | Growth funds invest in those stocks that typically don’t pay dividends or have a lower dividend yield. |
How to choose between growth funds and value funds?
Growth funds are suitable for those looking to invest in the fund for a longer tenure and have a good risk appetite. While the returns of the growth funds tend to be higher than the value funds’ returns, the risk or volatility in these funds is also higher than the value funds. On the other hand, value funds are suitable for people looking for a decent return on their investment where the volatility is limited.
Conclusion
Many times, the investment strategy of growth and value tends to overlap each other. Following the fund manager’s interviews, you can understand whether your fund is growth or value-oriented. You can also pay close attention to the investment objective and underlying assets’ performance of these funds. You can compare both funds and choose the best suits your requirements.
FAQ
Quick, blog-friendly answers to common questions.
Mutual fund investments are subject to market risks. Read all scheme related documents carefully.
