The world of investing is full of opportunities, but it also comes with its own set of complexities. Investors are always looking for the best approach to maximising their returns in the ever-volatile markets. Growth and value investing are two well-known types of fundamental investing, but how can you know which one is best for your portfolio and financial goals?
Whether you are looking for a long-term investment or something that may bring quick returns, knowing how these investments compare can give you a better idea of which type suits your financial goals better. Having said that, here are some key differences between value and growth funds, including their features, benefits, and drawbacks.
Understanding value investing and its features
Value investing focuses on buying undervalued stocks when their current market value is lower than the intrinsic value, with the expectation that the stocks will reach their true or intrinsic value or even exceed it. This strategy requires investors to search for undervalued stocks using technical analysis, charts, data, and financial ratios such as:
- Price-to-book ratio (PB)
- Price/earnings-growth (PEG) ratio
- Price-to-earnings (P/E) ratio
- Dividend yield, etc
The key motivation behind value investing is capital appreciation over time, not immediate gains or income generation.
Benefits of value investing
- Since you buy stocks at a lower price, you have a built-in margin of safety that protects you from losses if the stock doesn’t perform as expected.
- The strategy takes a long-term view which is ideal for investors who don’t want to worry about short-term fluctuations in the market and are willing to wait for their investments to pay off.
- With higher dividend yields, value funds can help generate steady income.
Overview of growth investing and its features
Growth funds are focused purely on capital appreciation. Investors choose stocks or growth mutual funds whose prices are expected to grow at a better rate than its peers or the overall market. This type of investing requires more research and analysis since you need to identify stocks with high-growth potential.
There are many ways to create a growth investment plan focusing on capital appreciation, such as investing in small-cap stocks with huge growth potential, emerging market stocks, blue chip stocks, or mutual fund investments focusing on high-growth sectors like technology and healthcare.
Benefits of growth investing
- You can choose high growth mutual funds to benefit from their high return potential.
- Diversifying your mutual fund portfolio with a mix of growth stocks can reduce overall volatility exposure.
- If done wisely, returns from mid and small cap growth mutual funds can be significantly higher than inflation.
Value funds vs growth funds – Comparing features and potential risks of both investment options
|Parameters||Growth funds||Value funds|
|Company type||Small to mid-sized with growth potential||Mature, financially strong companies|
|Market growth||Focused on capital appreciation and long-term growth||Focused on growth and dividends|
|Period of holding||Short term to long term||Long term|
|Benefit to investor||Capital gains||Dividend and stock price appreciation|
|Risk||Carry high risk due to equities’ volatility.||Intrinsic values are difficult to predict|
|P/E Ratio||P/E Ratio tends to be higher than value stocks||Generally, a low P/E Ratio|
|Expense||More expensive than value investments||Relatively less expensive|
|Bet returns on||Profitability estimates for the future||Market psychology|
|Ideal for||Investors with a moderate to high-risk appetite along with a long investment horizon||Investors aiming for regular income and long-term growth potential|
From the potential returns to the risk profile and overall investment strategy associated with each fund, evaluate your individual needs to invest in the right fund. Or you can even create a balanced portfolio that combines these two investment styles to get a consistent portfolio performance.