Difference Between Growth and Value Funds

Growth vs Value Funds
 

There are a number of different types of mutual funds in which individuals can invest in, depending on their requirements in terms of financial goals and objectives. Growth funds and value funds are two such mutual funds. While some investors may be interested in a regular income from a stable investment in a lower risk fund, others may be interested in gaining high growth and capital appreciation by taking on a higher level of risk. Both growth fund and value fund aim to offer investors higher financial returns to compensate for the risk taken. There are however a number of differences between growth and value funds in terms of the types of stocks they invest in and their financial goals. The article offers a clear overview of each type of mutual fund and explains the similarities and differences between growth and value funds.

What is Growth Fund?

Growth funds invest in stocks, bonds and securities that have faster than average growth potential in terms of the revenue generated, cash flows and potential for capital appreciation. Growth funds will invest in firms that are growth oriented and invest mainly in expansion plans, acquisitions, research & development, and continuously reinvest profits instead of using these funds to pay out dividends to shareholders. Therefore, most growth funds will not provide an income to their investors in terms of dividends or interest payments, and will reinvest it back into their business. Growth funds are known to carry higher risk as they are growing firms and are more sensitive to market conditions. However, growth funds have higher potential for larger returns, as growing firms have more potential and opportunities for investment, expansion, and development. Higher risk taken is rewarded with high return and financial benefits to the investor through growth and capital appreciation, which can be quite significant. Investors in growth funds need to have a higher risk tolerance and willingness to hold onto their investment for a longer period of time to ride out the fluctuations in value faced during the short term.

What is Value Fund?

Value funds invest in stocks and securities that have market prices lower than the stock’s actual value. Such stocks are said to be ‘undervalued’ as their true value is not accurately reflected in the market price. Such undervalued stocks will have a market value lower than its intrinsic value. Intrinsic value of a stock is defined as the present value of the stock’s future cash flows. There are a number of reasons for stocks to be undervalued. These include the economic downturn, distress experienced in a specific company or industry, external influences such as political instability, natural disasters, etc. Value funds often consist of stocks from mature firms that focus on safety rather than growth and, therefore, are of lower risk.

What is the difference between Growth Fund and Value Fund?

Growth funds and value funds are two types of mutual funds that pool money from a number of investors and invest in a range of financial securities. The main similarity between growth funds and value funds is that the aim of both funds is to offer financial benefits to its investors, in proportion to the risk and cost borne by them.

The main difference between growth funds and value funds lies in the financial goals of each fund. While growth funds aim to achieve high levels of growth and capital appreciation, value funds aim at safety and stability by investing in firms that are mature and have the potential to achieve higher value. As such growth funds are riskier as they invest in volatile stocks. Value funds, on the other hand, are less risky as they invest in stocks that have a high intrinsic value, which is currently not reflected in the market price, but have a high possibility of gaining value in the future.

Summary:

Growth Fund vs Value Fund

• There are a number of different types of mutual funds in which individuals can invest in, depending on their requirements in terms of financial goals and objectives. Growth funds and value funds are two such mutual funds.

• Growth funds invest in stocks, bonds and securities that have faster than average growth potential in terms of the revenue generated, cash flows and potential for capital appreciation.

• Growth funds will invest in firms that are growth oriented and invest mainly in expansion plans, acquisitions, research & development, and continuously reinvest profits instead of using these funds to pay out dividends to shareholders.

• Value funds invest in stocks and securities that have market prices which are lower than the stock’s actual value. Such stocks and said to be ‘undervalued’ as their true value is not accurately reflected in the market price.

• Value funds often consist of stocks from mature firms that focus on safety rather than growth and, therefore, are of lower risk.

• Furthermore, value funds invest in stocks that have a high intrinsic value which is currently not reflected in the market price, but have a high possibility of gaining value in the future.