Select MF: Growth vs Value Investing – What’s the difference?
August 20203 min read
All the Equity mutual funds in India can be divided in two major investment styles: Growth vs Value Investing. Even though there is a defined fund categorization by Sebi; every fund manager follows one of these two investment styles while creating a portfolio. Both of these investment styles have their own fanbase. So, what exactly is the difference between Growth Funds vs Value Funds? And which investment strategy will help in generating better returns? Let’s look at these investment styles in detail with this Select MF blog.
Growth vs Value Investing – The difference
Growth investing is an investment style that invests in stocks with stellar growth in earnings as well as the stock price. In most cases, the growth stocks are overpriced because the market expects the stock to do well fundamentally and hence buys the stock in anticipation. This drives the stock price higher compared to its earnings.
Growth stocks can outperform the market over the short term because of increased market interest and participation in it. However, the growth stocks are also highly volatile as they are sensitive to market news and negative sentiments. Hence, any drop in the stock’s earnings or any unexpected news can take the growth stock down.
Value investing is basically investing in stocks that are fundamentally strong but undervalued. Fund managers following this strategy look for stocks that have good management, steady growth in earnings, and still unnoticed by investors. Such stocks end up being a multi-bagger i.e. they give multifold returns if invested in lower valuations.
Since the valuations of such stocks are already low, the potential risk in these stocks is low. As compared to the peers in the industry and overall markets, Value stocks tend to underperform over the short term. Hence, an extended period of underperformance is also a part of the value investing style. Once, the company gets discovered by border markets, it gives returns better than peers and benchmark.
Growth vs Value Investing in Mutual Funds
Broadly, most of the Indian Mutual Funds follow the Growth investment style. Sebi has created a separate Value category for mutual funds during its re-categorization exercise. Hence funds from this category have to follow the Value investment style. Here are some of the funds that follow Value strategy and their composition:
As you can see, all the funds are large-cap oriented. The fund managers have gradually shifted the exposure from mid and small caps to large caps as before the recent market fall mid and small caps were extremely volatile. Hence, heavy large-cap exposures have helped funds to protect the downside. But what about the performance? As a strategy, how did growth and value investment fared in the past?
We have compared the MSCI indices as they give an accurate representation of both Growth and value investment styles. Clearly, over shorter horizons Value strategy has outperformed growth because the market was volatile due to the Coronavirus pandemic. Ideally, Value strategy works out when the markets are very volatile and the economy is struggling. And the growth strategy works when the economy does well and the markets are stable.
Which investment strategy should you invest in: Growth or Value?
We have always emphasized on diversification of the portfolio of mutual funds. And, this diversification goes beyond the number of funds you should have in the portfolio. The mutual fund portfolio should consist of funds that have different investment styles. Hence, instead of investing in only one strategy, ideally, you should have a mix of both growth and value strategy.
Since Value strategy takes a long time to play out, the long term goals like retirement can have some exposure towards Value funds. Whereas, the medium to long term goals can have exposure towards the funds that follow growth strategy. This type of exposure can help the mutual fund portfolio across the various market cycles.
The exposure limits to both Value and Growth strategy funds will depend upon the investors’ risk profile and goals. You can reach out to our research team to get a suitable recommendation based on your requirements.
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