The views and opinions expressed here are those of Quantum Mutual Fund and do not necessarily reflect the views held by Value Research and its employees.
Equity mutual funds primarily follow one of the two popular styles of investing - Growth or Value. Here's how they differ in terms of risks, returns and other factors.
Growth style of investing
Funds following the Growth style invest in companies which are expected to grow faster than other companies in the future (by way of profits earned, revenues and/or cash flows). High-growth companies are typically in rapidly changing industries and must continually re-invest profits in order to maintain or grow their market position. This can lead to a compounding effect over time that generates tremendous returns. Such companies offer higher potential, but that rapid change can also work against them if they invest incorrectly. Therefore, growth companies tend to be riskier. There may be little or no earnings today but growth investors tend to pay more attention to a company's future earnings potential instead of focusing on a seemingly high valuation on the most recent earnings and cash flow figures. Following are their main characteristics:
- More expensive: The prices of the underlying stocks in a growth fund's portfolio tend to be high relative to their fundamentals such as sales, profits and dividends. Growth investors justify investing in what looks like an expensive stock today with the belief that the company's fundamentals will increase more rapidly in the future.
- Lower margin of safety: In frothy markets, investors in growth funds may experience price swings in greater magnitude. Such funds are best suited for investors who have greater risk tolerance and a longer time horizon.
Value style of investing
Funds following the Value style invest in companies whose stock prices don't reflect their underlying worth, sometimes referred to as 'intrinsic value'. Value investors believe that such stocks are selling at a price that is lower in relation to current earnings or assets or other fundamental value measures. Typically stocks that are selling at lower multiples of earnings or other measures have had temporary setbacks in their business, or are in industries with lower growth outlooks. Such businesses may appear 'boring' but the resulting neglect from the market can create massive mis-pricing opportunities. Value investors bet that as time goes on, the market will properly recognize the company's true value and the price will rise. They are characterized by the following:
- Less Expensive: The stock prices a value fund's underlying holdings tend to be low relative to their fundamentals such as sales, profits and dividends.
- Higher Margin of safety: Because value investors typically pay lesser than the intrinsic worth of a company, a cushion is inherently built into its stock price. Therefore, such stocks tend to be hit less hard if the earnings outlook changes a bit. In contrast, a downward revision in the growth projections of a growth company may have an outsized impact on its stock price, since future growth is precisely what investors are paying for.
So, while there is no right or wrong in these two styles of investment, at Quantum we follow the value style of investing. Our equity funds, including Quantum Long Term Equity Value Fund, chase value stocks. To know more about our investment philosophy, click here.
Disclaimer: The views expressed in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader.
Mutual fund investments are subject to market risks read all scheme related documents carefully.