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Investing: Growth vs Value

investing-growth-vs-value
investing-growth-vs-value

Hello! Welcome to my another article. Today we will know about investing. Growth Investing and Value Investing. We will try to make it simple for you to understand the things. We will discuss the following points:

  • Introduction
  • Growth Funds
  • Essential Qualities of Growth Funds
  • Value Funds
  • Essential Qualities of Value Funds
  • Growth, Value or Both?


Introduction:

Value and Growth are two basic point of views or styles, for investments in stocks and stock mutual funds. Growth investors search these companies which have high earning growth. On the other hand, value investors search stocks that are underrated in the market. Both the styles or point of views are companion of each other because they add some variations in your portfolio.


Growth Funds :

Growth stocks are the stocks which represent a list or category of companies which have performed well in recent years, and hence earned better-than-average gains. At that time market expects same level of growth from these companies to earn high profit, although there is no guarantee of it. Some companies, which are in emerging growth stage, are capable of achieve growth with high earning but they don't have a strong earning growth history.

Growth fund is a type of mutual funds that invests in stocks of growing companies to gain maximum value over capital. That's why they search for companies with a track record of very good revenue or new companies with better growth potential. But on the other hand, the risk is also higher. These growth funds, along with Value funds or mixture of both funds create one of the important types of equity mutual funds. These funds are diversified in small-term, mid-term and long-term groupings of market capitalization.
When investors make their portfolio for growth funds, they mostly invest in companies which have good progress rate and which gives good returns over investments. After that, they reinvest their earnings for acquisition of new business, expansion of their business, development and research of their business.


Essential Qualities of Growth Funds:

  • Possibility of High Returns: As these funds have probability of higher returns over their capital investment, attracts lots of investors in the market. Some professional fund managers takes much efforts in identifying the potential of the stocks and pick the stocks.
  • Risks: If you are an investor, it is very important for you to know that growth funds also have more risk fluctuations. For long term, these funds are capable to grow strongly.
  • Volatility of Stocks: The major disadvantage that every investor should know is, growth stocks are very volatile in nature. Investors experience a sudden rise and sudden drop in prices of growth stocks. These stocks are helpful for investors who are ready to take bigger risks.
  • Efficiency of Tax: If your earnings from long term capital gains are above Rs 1 Lakh and if you hold them for more than 1 year, then you have to pay Long Term Capital Gains Tax (LTCG Tax) at the rate of 10%. But still, they are more cost-effective compared to value stock mutual funds.
  • Other Expenses: In terms of your expenses ratio, growth funds costs you more as it also have management charge. The Annual Maintenance Charge (AMC) deducted from your profits every year.
  • Professional Money Management: Growth funds are generally managed by a group of experts, who identify the right growth stocks for the investors. These expert managers take all the decisions about buying and selling of the stocks. In short, you just become a passive investor.
  • Diversified Portfolio: A mixture of growth stocks in mutual funds can be helpful as it minimizes the overall risk of volatile stock investments.

Some managers who are interested in value funds look for the companies whose stock prices have fallen down but they can still perform well and grow again. Stocks of very new companies, which are not well known by investors are also included in value group.


Value Funds:

Open ended equity schemes which follow strategy of value investment are termed as value funds. These funds are traded at some discounted rates and invested in the share of companies. Most of the professional investors prefer these stocks because, due to some reasons they may seen undervalued, but they also provides very good returns in long term. Value funds provides high dividend over time.


Essential Qualities Of Value Funds:

  • Comparatively Lower Price: The stock prices of well performing companies can grow again after falling down if the the value of the company is identified by other market investors.
  • Price Less than Competitors: Some value investors agree that most of the value stocks are made. They think so because some investors get over-excited after knowing about recent problem in the company like legal issues, bad publicity, rumors, saddening earnings of the company, etc. Such incidents can prove harmful to long-term plans of the company and can raise unnecessary doubts about the company.
  • Bear Less Risks than Market: According to the experts, value stock is good investment option than growth stock who want long term investments. Value stocks may take more risk of fluctuation of price than the growth stock.


Choosing: Growth, Value or Both ?

Among these two growth and value, which one has more chances to gain high returns over long term ? The fight and debate between growth investing and value investing is still continue over decades. Both the sides argues each other along with statistics to their argues. Few of the studies and data proved that value investing has better growth over long term. Some of the value investors think that short-term focus on the stock can leads to decrease in price of that stock. Hence, value investors create a very good opportunity to buy the stocks.

After study of all the data from history, it it seen that-

  • Generally, when there is decrease in rates of interest and hence the profit of company is increasing, growth stocks have the capability to perform well. Growth stocks will also penalized when the economy comes to normal.
  • Value stocks, which are considered as stocks of circular industries, can also perform well in early economic recovery stage. But, there are more chances to fall down in constant market.

In long term investments, some of the investors combine both value stocks and growth stocks. So that they can get big returns over their investments with minimum risk. Theoretically, this strategy permits the investors to earn all round the business cycle in which the normal market conditions are good either for growth investment or value investment.
Here are some books which can be referred for more points:

Value Investing And Behavioral Finance

What Every Indian Should Know Before Investing

Investing In Stock Market: January 2021 Edition

besides this, there are so many books and articles are available to explore. You can refer other books too. Gain as much information as you can.

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