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Difference Between Value Funds vs Growth Funds Explained
An investment in a proper fund fetches you a good return quickly. There are many options available for investors to invest their money. The value fund and the growth fund are among them. Both funds aim to provide long-term capital appreciation, requiring careful research to determine the right fit for an investor's financial goals.
The value funds focus on undervalued stocks, while growth funds target companies with high potential. Choosing between them can be tricky. However, understanding the difference between value funds and growth funds can help you to make a wise investment decision. This article will guide you in making wise investment decisions.
Table of Contents
What are Growth Funds?
Growth funds are equity mutual portfolios that aim at capital appreciation without any dividend payment. The money invested by the investors is reinvested steadily in the stock market to increase the gains.
This will lead to an increase in the net asset value (NAV) of growth funds if the stock prices increase and vice versa. Growth mutual funds are ranked in moderate-to-high risk levels and consist of companies with good growth.
There are different portfolios of growth funds, such as:
What are Value Funds?
Value funds are mutual equity funds that invest in undervalued market equities. These undervalued equities are usually priced below their intrinsic value. It is because of fluctuations in the market or other factors. Compared to growth-oriented funds, it focuses on value in terms of future growth potential in these stocks.
These funds do not attract short-term benefits. Instead, they protect capital and make a steady flow of dividends possible when the fund attains profits. The investor does not get quick returns, but the value funds are considered relatively safer for those desirous of steady, long-term growth.
What is the Difference Between Value Funds and Growth Funds?
Knowing the difference between value investing and growth investing enables you to opt for one that gives a higher return on investment. To make you clear in your decision, here is a table representing the differences of each fund:
Key Investment Strategies in Growth Funds vs Value Funds
Investors follow different strategies when choosing between growth and value funds. While growth funds focus on companies with rapidly increasing earnings, value funds prioritize stable companies with undervalued stocks.
Advantages of Value Fund and Growth Fund
Value funds offer steady returns with lower risk by investing in mature, predictable companies. While growth funds focus on high-potential returns by investing in rapidly growing companies. Here's a breakdown of the advantages below:
Valuation Considerations in Growth Fund and Value Fund
The intrinsic value of a company or stock can help investors determine the investment based on each rupee of profit the company makes. The most generally used stock valuation technique in this fund is the Price-To-Earn-(P/E) ratio, represented by:
P/E ratio = Share Price / Earning Per Share
For Example, if the market price of a share of the company is 100 and the earnings per share is 10, then the P/E ratio is calculated in the following way:
P/E ratio = 100 / 10 = 10
Therefore, the P/E ratio of the company is 10.
Apart from the P/E ratio, different metrics are used to value the stocks. The table below depicts the generally used valuation metrics and their returns for the growth fund and value fund:
Growth Funds or Value Funds: Which is Better?
1. Growth Funds
- They appeal to those investors whose primary goal is long-term capital appreciation.
- Ideal for investors willing to take risks, bear market volatility, and invest for the long haul.
- They tend to outperform during bull markets and times of economic expansion.
- They invest in companies that do not usually pay dividends but reinvest most of their earnings.
2. Value Funds
- Suitable for conservative investors looking for stability and steady returns.
- Yield dividend income that doubles potential stock appreciation.
- Perform well in severe market declines and economic recoveries.
- Invest in companies considered undervalued but have strong fundamentals.
Additionally, there is a hybrid strategy, like Growth At a Reasonable Price (GARP), that provides the stock selection criteria that balance growth and valuation strategies. This makes your investment safe and gives you a yield of high returns.
In conclusion, both growth and value funds are good investment options. A growth fund fetches you higher returns or losses based on the boom and bust cycle of the market. The value fund makes it a steady path and gives you lesser returns and losses than growth funds. Thus, a good investment includes a bit of luck, a fair amount of skill, and a lot of discipline.
Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.
We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.
FAQs about Value Fund vs Growth Fund
How do value funds make a profit?
Which one is riskier, growth or value fund?
What is the return potential of growth funds?
What is the return potential of value funds?
Do growth funds pay dividends?
What are the tax rates for long-term and short-term capital gains from growth funds?
The tax rates for long-term and short-term capital gains from growth funds are as given below:
- Long-term capital gains are tax-free if held for over a year in an equity-dominated fund.
- Short-term capital gains are taxed at a flat rate for equity funds, while debt funds follow income tax slabs.
How are value funds taxed on long-term capital gains?
Growth or value funds: which is better for investors seeking regular income?
Can growth and value funds be hybridized?
How does stock price fluctuation affect the growth and value of funds?
What are the key differences between value investing and growth investing?
What is an example of value and growth investing?
Do value funds have consistent dividend payments?
Which is better: value funds or growth funds?
Other Important Articles about Mutual Funds
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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