When you come across the mutual fund spec- trum, it is quite essential to know your terms. Especially when it comes to the different kinds of mutual funds, not all mutual funds are called mutual funds; they all have particular names that mean something, and these funds differ from one another. In this post, we are going to speak about growth funds and value funds, how they are different from each other, how they work, and who can invest in them. Get ready, intuitive investors - this is your time to get the details under your sleeve.
Difference Between Growth Funds and Value Funds
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Growth Fund |
Value Fund |
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Meaning |
A growth fund is a portfolio of stocks that concentrates on capital appreciation. It will have little to no dividend payouts. The portfolio is constructed with above-average growth that reinvests earnings into research and development. Examples of Growth funds are Vanguard Growth Index Fund, Fidelity Blue Chip Growth Fund and more. |
A Value Fund is a kind of mutual fund that invests in stocks that are undervalued in the market. It buys stocks at a bargain price and sells them when their true value is realised. This aims to generate long-term capital appreciation. An example of a good value fund is the Groww Value Fund. |
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Function |
The high risk and high reward phenomena of the growth fund could make it an ideal choice for investors who will not be retiring soon. Usually, investors need a high tolerance for risk and a holding period that ranges from 5 years to 10 years. Growth fund holdings would often have a high PE ratio and PS ratio multiples. This trade-off from investors is the above-average revenue and earnings gains that these companies produce. |
Value funds or value investing is a strategy developed by Benjamin Graham and Warren Buffett. It is where the fund manager chooses stocks for value funds according to fundamental characteristics that are associated with a stock's intrinsic value. Value funds usually use a long-term investing allocation that has the potential to grow steadily over time. Is it often linked with investment due diligence and patience? |
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Risk |
The risk of growth funds is considerably higher than that of any other investment funds, making them highly volatile with great price movements. |
These funds have lower risk since their past performance has shown a good risk-adjusted return base. Since value funds invest in undervalued stocks that have already seen a price decline, this feature is present. This increases the potential of value fund schemes to generate higher risk-adjusted returns in the long run. |
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Reward |
The aim here is capital appreciation. Unlike Dividend Funds, which focus on generating consistent income, Growth Funds seek to increase the value of your investment over time. These funds are often invested in firms that reinvest profits rather than paying dividends. |
In the long run, value funds can provide better returns while being less volatile than growth funds. Value funds invest in stocks that the market has undervalued, hoping that the market will recognize their actual potential and adjust their prices. Value funds also have reduced volatility since they invest in reliable businesses with predictable earnings and cash flows. |
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Expense Ratio |
Growth funds are expensive in nature, leading them to have a higher expense ratio than value funds. |
Since value funds are lower in costs, the expense ratio of this fund is also much lower. |
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Suitable Investors
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Patient investors who intend to maintain their shares for several years or more are more likely to profit from the potential wealth appreciation that growth funds may provide. |
Value mutual funds are ideal for investors with a long time horizon, a high-risk tolerance, and a contrarian outlook. Value investing necessitates patience and discipline since the market may take some time to appreciate the underlying value of cheap stocks. |
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Tenure |
A growth fund investment needs from 5 to 10 years. |
A minimum of 5 years is needed to invest in value funds. |
Now that you understand the specifics of both kinds of funds, put them against each other and analyze which one is for you, but before you do, there are quite some questions you need to ask yourself.
- What is the tenure of your investment?
- How much risk can you handle?
- What kind of rewards do you wish to see?
- What are your financial goals?
Once you have answered these questions, you can determine which is the best option for your investment—whether it is value funds or growth funds.
Growth Vs Value
Value stocks are theoretically thought to have a reduced level of risk and volatility since they are often found among larger, more established firms. Even if they do not reach the experts' or investors' goal prices, they may nevertheless provide some capital gain. Also, bear in mind that these stocks frequently yield dividends.
In contrast, growth stocks often do not pay dividends. Instead, they reinvest retained earnings to help the firm grow. Investors in growth stocks may face a higher risk of loss, especially if the firm fails to meet growth projections.
Conclusion
This post entails the meaning, function, risk, reward, expense ratio, suitable investors and tenure of growth and value funds. Now that you know them this well, all you have to do is choose the fund that suits you the most.