Difference Between Growth Funds and Value Funds

Edited by Diffzy | Updated on: October 05, 2022

       

Difference Between Growth Funds and Value Funds Difference Between Growth Funds and Value Funds

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Introduction

Growing up, to instil values of savings and the idea of having a secure future, parents give their children a little piggy bank. For those unfamiliar with this concept, a piggy bank is a small container with a slot for a coin and a tiny door on the opposite end that can be opened if you wish to use the coin. When my parents gave my piggy bank to me, it was cylindrical, a little wider than a soda can. The coins went into my little piggy bank every time my parents had spare change. I don’t remember what happened to that collection, but I vaguely remember my younger sister meddling with the piggy bank. The same routine continues even today. I don’t have the same piggy bank now but the one that currently holds my spare change curiously keeps getting lighter every time my sister is around. Perhaps, our parents should have equipped her with the piggy bank. I’m certain they did but she lost the key to the tiny door. Siblings!

To keep your savings secure, you need to have a more secure facility than a piggy bank. Savings are of utmost importance. You never know when you could encounter a rainy day and require those funds to rescue you. A rainy day could be anything. It could be the death of your sponsor and their will signing off the property to their beloved pet; it could be an avid stalker sending death threats, needing you to relocate; it could be your dog getting pregnant because the neighbour’s dog could not stay away. The possibilities are endless and they could be bleak. It is always good to have a safety net or since we’re comparing horrible scenarios to a rainy day, it is always better to have your raincoat, umbrella and gumboots in your bag. You don’t want to catch a cold, after all.

Growth Funds vs Value Funds

One way to secure one’s future is by investing in stock mutual funds. Stock funds are companies that invest in individual stocks of publicly traded companies. For example, if one invests in a company that owns shares of X, Y and Z, then one has invested in a stock fund. When one invests in such funds, there is diversification. The risk of loss from just one company is reduced. Growth funds and value funds are two main types of stock mutual funds. Growth funds are expected to have a better outcome because of their future potential and value funds are ones that trade below their worth. To invest in either is dependent on one’s needs. Each of them has its pros and cons. Let us see how they differ so we can decide which stock fund to invest in. 

Difference Between Growth Funds and Value Funds in a Tabular Form

Table: Growth Funds vs Value Funds
Parameters of Comparison
Growth Funds
Value Funds
Definition
Growth funds are stock funds that are expected to outperform the market.
Value funds are stock funds that sell at a lower price in the market.
Type of investment
Growth funds are an aggressive type of investment.
Value funds are a less aggressive type of investment.
Returns
Growth funds have higher returns.
Value funds have low returns.
Risks involved
Growth funds have a higher risk.
Value funds have a lower risk.
Period of returns
Growth funds are known to have higher returns both in the long term and short term.
Value funds are known to have steady returns in the long run.
Dividends payoffs
Dividends paid are low to none since growth funds gain profits by selling or redeeming investments.
Value funds are paid periodically through dividends depending upon the performance thus, the dividends are a combination of price appreciation and yields.
Entity portfolio
The companies in growth funds have higher market goals and higher earnings.
The companies in value funds have lower sales, hence, they have lower earnings.
Cost of purchase
Growth funds have a high cost of purchase.
Value funds have a lower cost of purchase.
Ideal target market
Growth funds are best suited to those interested in steady long-term growth and capital appreciation.
Value funds are best suited for those who wish for a regular income flow.

What are Growth Funds?

Growth funds are funds that are considered by analysts to outperform the overall market or a specified segment of the market for a particular period. They are stock funds held in growth companies. Growth stock funds are also known as ‘aggressive stocks’ because they bear a higher risk.

While they do bear higher risk, they also have higher returns which means that they have higher performance compared to the other companies in the market. Growth funds pay no dividends to the investors. The returns come solely from the price appreciation of the underlying assets. Also, since they have higher yields, they are more expensive and cost a lot more than value funds. As already mentioned, growth funds are known to have a higher market risk with a potential for greater market returns. The risk is the downside since the high prices can easily fall at a high rate with something as simple as negative news about the company.

Growth funds come in portfolios like large, small, mid, micro capitalization and diversified equity funds. The large-cap growth funds invest in the big players or big companies that have guaranteed growth potential and the micro-cap growth funds invest in smaller or new companies which show high growth potential.

Growth companies are generally thought to do well over the years. This is mostly because they are invested in a product or a product line that is a fan-favourite and sells well or because they have an edge over the other companies in the market.

What are Value Funds?

Value funds are stock funds in mostly larger and well-established companies that are selling or trading at a price deemed lesser than the market value by the analysts. The concept behind a value investing strategy with undervalued stocks is that once the market realizes the true value of the stocks, the share prices will rise and the investor will gain from the price increase.

The stock can get undervalued for many reasons. As afore-mentioned even negative attention to the company can result in the public having negative views of the company. The value, thus, reduces, but if the company’s finances are still relatively solid, the keen-eyed value-seekers will utilize this opportunity to invest in the stock as they believe the public will sooner or later forget about the negative incident and the price will rise back to its prior state giving them a profit.

Theoretically, value funds are known to bear a lower risk and lower volatility since they are usually in large and well-established companies. The stocks might not get back to the target price that the analysts predict but they tend to offer some capital growth. They also offer dividends. The dividend yield in comparison to the growth funds is higher but these are given only when the good profits have been recapped. Dividends often form a source of income, especially for retired people. It is why they are also known as ‘income funds’.

Value investors often thoroughly research the market and companies to decide whether a stock can be purchased or has a ‘good value’. They may also choose to reinvest their dividends to purchase more shares of the value fund. This strategy is useful for those who are willing to grow their investment portfolio and not looking for an immediate income. Value funds are typically used for long-term investments as they see steady growth over time. They require patience and due diligence.

Almost all large fund families offer value funds. These value funds, like growth funds, are broken down into components based on market capitalization like small-cap, mid-cap and large-cap value funds. As already mentioned, the idea behind value funds is to sell at a lower price. The reason this is possible is that the market has some inefficiencies. Value fund managers are adept at figuring out these inefficiencies. Once the market rectifies these inefficiencies, the investor stands to gain from the increase in the share price.

Historically, in the long-term value stock funds have been shown to outperform growth stock funds. Although, in the last ten years, growth stock funds have outperformed value stock funds.

Main Differences Between Growth Funds and Value Funds In Points

Following are the main differences between growth funds and value funds:

  1. Growth funds are stock funds expected to do better than other companies in the market, while value funds are the stock funds that sell at a lower price in the market.
  2. Growth funds are an aggressive type of investment. In comparison, value funds are a less aggressive type of investment.
  3. Growth funds are expected to gain more quickly than the stock market and have higher returns. On the other hand, value funds have low returns.
  4. Growth funds have a higher risk involved, whereas value funds have a low risk.
  5. Growth funds have higher returns both in long-term investments and short-term investments, while in value funds, there are steady returns in the long run.
  6. The dividends paid are low to none in growth funds since they gain profits by selling or redeeming investments. In value funds, the dividends are a combination of price appreciation and yields.
  7. The companies with growth funds have higher market goals, thus, they have higher earnings, whereas companies with value funds have lower sales and lower earnings.
  8. Growth funds are ideal for those who wish for steady long-term growth and capital appreciation, while value funds are ideal for those who wish for a steady income flow.

Conclusion

Growth funds and value funds are both funds that one can invest in. The decision to invest in either is dependent on the investor, their income and risk tolerance. Growth funds are a portfolio of stocks that are known by analysts to outperform in the market. The goal of growth funds is capital appreciation and as such are found in growth companies that are expected to do better than others in the market at a faster pace. They are an aggressive type of investment since they bear a high risk. Despite the high risk, they also have high returns. This makes them more suitable for those who do not wish to retire any time soon.

Value funds, on the other hand, are best suited for those who want to retire. They can provide a steady income. Value funds are funds in larger, well-established companies that sell stocks for a lower price in the market. The idea is to have the people realize the true value and invest, thus, raising the price of the shares and giving the investors a profit. Value funds bear a lower risk and as such have lower earnings. But they do pay dividends. It is also important to note that the performance of either fund depends on which cycle the market is in. Value funds are found to perform better in the bear market (declining market) and economic recessions, while growth funds are found to perform better during the bull market (rising market) and economic expansions. Both, thus, vary from each other and need to be carefully assessed before one makes a decision. The research and analysis of investments are of utmost importance as savings are imperative. You never know when you might have to pack your bags as you steal off into the night, change the number plates on your car, dye your hair a different shade, purchase multiple flight tickets to veer off suspicion, learn to fly a chopper or ride a jet ski, book hotel rooms because you cannot bear to live in your car, also, it would help if you mastered a martial art or any other fighting technique, for the sake of personal protection. Okay, it might not be as dramatic but you never know when you might need your savings. One always has irritating siblings.


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"Difference Between Growth Funds and Value Funds." Diffzy.com, 2022. Sun. 27 Nov. 2022. <https://www.diffzy.com/article/difference-between-growth-funds-and-value-funds-507>.



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