While the goal of investing strategies is to increase your investment, each type offers a unique approach to accommodate different types of investors. Growth funds, as the names imply, concentrate on the steady growth of your investment, while value funds concentrate on providing value-added or consistent returns. To understand the differences better, here is what you should know about growth funds vs value funds investment.
Key characteristics of growth funds
a. Higher priced than market
Due to the higher growth rate, growth funds tend to have a competitive advantage over other businesses operating in the same market. As a result, some investors are willing to pay high price-to-earnings multiples with the hope of selling them for even greater prices.
b. High-earning growth record
Regardless of the economic situation, growth funds frequently exhibit higher growth rates than the general market. It suggests that the stocks expand faster than the market’s average stock.
c. More volatile
Growth funds are a desirable investment option and can produce significant gains over the long run. However, they can be considered high-risk investments with the level of uncertainty they are subject to in the short term.
Key characteristics of Value Funds
1. Lower priced than the broader market
Value funds might have a lower price than the market, but since stocks of good companies will recover over time, other investors will eventually see their true worth.
2. Carries a little bit less risk than the broader market
Due to their slow turnaround times, value funds can be better suited to long-term investors. However, they have a higher risk of price fluctuation. That’s why investors consider a metric known as the “margin of safety” to keep the level of risk in check.
Example of growth and value stocks
a. Growth > Alphabet (GOOG)
Formerly known as Google, Alphabet, Inc. is an excellent example of growth funds. Based on its market capitalization, Alphabet ranks third among US companies’ stocks. It’s not surprising, considering that with more than 2.5 billion active users in more than 190 countries, Google’s Android is the most widely used operating system in the entire globe.
b. Value > JPMorgan Chase (JPM)
As America’s largest bank by assets, JPMorgan has performed very well throughout recessions and the pandemic. Their share price didn’t fall below tangible book value even in March 2020, when stocks were tanking due to the epidemic.
Growth, value, or both?
Certain studies show that value investing wins over long periods when investing in value stocks. In other words, for short-term battles, growth investment is the winner. Investors are prepared to pay a higher premium for growth in upcoming years because they fear short-term events and a slow-growing economy.
However, your considerations will be the final factor in determining whether you will invest in growth funds or value funds.
Even if that’s the case, one of the most commonly used strategies by new investors is value funds investing. Since it’s simple to comprehend, you can do thorough research on this method, presenting you with a strong probability of success.
According to statistics provided by Nobel Prize winner Eugene Fama and Dartmouth professor Kenneth French from 1927 to 2019, value equities have outperformed growth stocks 93% of the time during rolling 15-year periods.
It’s worth noting that over shorter periods, the performance of either growth funds or value funds will also depend in large part upon the point in the cycle that the market happens to be in. Some investors would want both of these strategies. Since each style can perform better during various market periods, the answer to which investment style is better depends on multiple factors.
Your portfolio should contain value funds that will give it stability and growth funds to help increase your investment. These two will work to balance out the risks you may face.