Value Funds vs Growth Funds

Growth Funds Vs Value Funds
Capitalising On Different Opportunities

Value funds and Growth funds are as different as chalk and cheese and they outperform in different market conditions. You can invest in both these funds to complement your returns in different types of market conditions.

You will find lot of bytes and reams of paper being used to discuss about which is a better strategy, value or growth.



The proponents of both the strategies vehemently guard their turf with equally good arguments in their favour. Various mutual fund schemes have been launched with themes dedicated to value and growth. To implement a successful investment strategy and to build a return-efficient portfolio, an investor should know the difference between these two categories. These categories are basically due to the investment strategies of these funds, namely, the types of stocks that form part of their portfolios. Let’s now see how these funds work and how you can use them to enhance your total returns. 

Growth Funds 

Growth funds are the type of mutual funds which invest in growth stocks, which are stocks of emerging companies that are exhibiting certain characteristics such as higher growth in revenue. This is the main reason why growth funds invest in companies with proven track record of revenue growth, despite having loss or minimal profit. The criteria that these companies should meet is that they should post higher growth in their topline and their business should be scalable. These funds are high risk investments as many a time the growth fizzles out. Hence, these funds are suitable for the aggressive investors. Growth investing strategy typically focus on the company’s potential for reaping returns with its current momentum. Growth stocks are the stocks of the younger companies that reinvest their earnings in growing the business, instead of paying dividends and are identified as growing significantly faster than their competition. These companies may also be a part of a sunrise industry that is witnessing rapid expansion, such as telecom or technology companies a decade ago. Growth investing chases the market high fliers. This investing strategy believes the future performance of these stocks will imitate the past performance. The growth investing strategy seeks capital appreciation from capital gains only and not from dividends.

Value Funds 

Value funds are the funds that follow the value investing principle, while selecting stocks for their portfolio. These funds invest in companies which are fundamentally strong, but are undervalued by the market. The fund enters these scrips believing that the share price of the company will not remain undervalued forever, so the fund eyes to make money by entering the scrip before the expected upturn. The companies these funds usually prefer to invest in are those with lower valuations and have fallen out of the mainstream.

Value investing is all about the finding gems from the mine. That is, finding stocks whose market price does not necessarily reflect their worth. The value investors or fund managers actively hunt for these types of securities which seem to have higher potential in the long run and hold promise of a healthy return. These are analysed based on the company’s intrinsic value and the current value. The intrinsic value of the business is determined by evaluating the fundamental attributes of the company, including its business model, management, financial statements and competitive environment. Value investing seeks returns from both capital gains and dividends.

When compared with the value stocks, growth stocks have the potential to offer higher returns, but the prices of these stocks also tend to be more volatile. The key risk is a sudden price drop in the stock due to negative earnings or any other such reason. So, investor should remember that volatility is a part of the growth game while investing in funds that follow growth strategy. 

Both growth and value investing strategies are fundamental approaches, or styles, in mutual fund investing. While growth investors hunt for companies that offer strong revenue growth, value investors hunt for stocks that appear to be undervalued by the market. 

Their Performance Over Time 

The battle between these two strategies is age-old and the contention on which one would perform better is also a matter of debate between investors. So, we have analysed the yearly returns since 2014 of various schemes under the categories of value funds and growth funds. To summarise, we have highlighted the average returns of all the schemes following value and growth strategies in the table below (Table 1). Let us just have a look at the performance of these funds over the period. 

The value funds have performed far better in the year of 2014. Post-2014 also, the value funds have managed to outperform growth funds. In the year 2014, the average return from the value funds was around 80%, whereas the average return from the growth funds was 50%. Only in the year 2016 the average return from growth funds has outperformed the value funds, but that too marginally. To analyse these trends with some more depth, we have gone through the quarterly returns from these categories. Surprisingly, if we see the short-term returns, the growth funds have delivered more returns. So, the growth funds can be used for the short-term horizon, while value funds perform in the longer run as the stocks start their run-up post recognition of the stock at its fair value.

Which Strategy To Follow

Now, the question that remains is: Which strategy to follow and which funds should be considered? Both these strategies have their own pros and cons, but the crucial point is which one will deliver maximum returns. Both these strategies have statistical data supporting their arguments on returns. But if we observe minutely, the growth funds perform better in market situations where interest rates are falling and earnings growth support the stocks. In the bull market too, these funds are poised to reap more returns with market movement. On the contrary, in the bull market, value funds lag in the shorter run as they are in a phase where these funds look for potential buying opportunities from the sectors which gets undervalued in such market. So, these funds will to do well when the economy goes into recovery mode.

Considering diversification, investors should invest in both these funds to complement returns in different market conditions. But considering the current market situation, one can rely more on growth funds for returns. Nevertheless, if you are planning for a longer term investment horizon and have the patience to wait till the market finds potential in your investments, you can go for value funds as these funds spot and grab buying opportunities that can turn into multi-baggers in SD the coming years.

The growth funds can be used for the short-term horizon, while value funds perform in the longer run as the stocks start their run-up post recognition of the stock at its fair value.