Value Funds and Growth Funds are two different options available for investors to invest in market. Both the funds outperform in different market conditions and so keeping a mix of both of them in your portfolio can help grow your returns in different types of market condition.
One should be aware of the difference between these two types of fund to help build a high return portfolio and to make strategies before any investment.
Lets discuss about each of them in detail what these funds are and how they work
GROWTH FUNDS :
Growth funds are those funds which invest in growing and emerging companies. By high growth companies, we typically mean the companies whose sales are growing aggressively and who are focusing on capital expansion.
Some of the common features of growing companies are:
- Higher growth in revenue
- Young and unestablished companies
- Low dividend paying
- Use the profits for rapid expansion and growing the business.
- Higher risk as maintaining the growth is not certain.
This investing strategy is based on the assumption that the future performance of these companies will be similar to its past performance. If that assumption fails the share price see a sharp correction.
So by looking on the characteristics it is evident that growth funds are for aggressive investors whose risk capacity is more. This is a high risk investment as maintaining the same growth is not guaranteed. Also the investors should not expect good dividends and capital gain is the major way to get profit.
VALUE FUNDS :
Value funds are those funds that invest in companies which are undervalued in current market. By undervalued companies, we mean the companies whose share price doesn’t match with their real worth.
Value investors search for stocks which has high potential to become multibaggers in long term.
So the main focus is to find stocks whose intrinsic value is higher than the current value. The intrinsic value is determined by analysing the fundamentals of the company, their management, the business model etc.
Some of the common features of value funds are:
- The intrinsic value is lower and underperforming in current market.
- It is suitable for long term view only.
- Fundamentals of the company is intact and business model should be promising.
- provide both capital gains and dividend.
- short term return is not expected.
- less risk and less volatile.
Generally growth funds perform better in bull market. When interest rates fall and earnings growth are good growth funds give very good returns. In the contrary the value funds perform better in longer run and when the economy goes in recovery mode.
Both the growth and value fund investing are fundamental approaches but they work in different market environment. A mix of two will help investor get good returns in different market condition.
