Growth Funds versus Value Funds

Most Asset Management Companies (AMCs) offer two types of funds – growth funds and value funds, which are also known as dividend funds. All mutual funds aim at growing your investment, but each kind of fund offers a different kind of investing style to suit various kinds of investors. As the names suggest, growth funds focus on consistent growth of your investment, while value funds concentrate on giving value or regular returns for your investment.

Growth Funds

Growth funds are an equity mutual fund portfolio aiming at capital appreciation and usually does not have any dividend payment. The money put in by investors is constantly reinvested in the stock market for gains. Due to this, the NAV of a growth fund is usually high when the stocks are gaining and it could go down when the stocks are losing in the market. Growth funds are moderate-to-high in risk levels and consists of companies that with good growth. Growth funds come in various kinds of portfolios – large capitalisation (cap), small cap, mid-cap, micro-cap, diversified equity funds, etc.

Large-cap growth funds invest in the biggest players in the market, have high growth record, and could comprise either domestic companies and/or international companies. Among the best large-cap funds in India are: SBI Blue Chip Fund, Kotak Select Focus Fund and Franklin India Opportunities Fund. Small and mid-cap funds have a healthy mix of stocks of small and medium companies, domestic and/or international, that give good returns. Some of the best small and mid-cap growth funds in India are: DSP BlackRock Micro Cap Fund, Franklin India Smaller Companies Fund and Mirae Asset Emerging Bluechip Fund.

Value Funds

Value funds are a kind of equity mutual fund where the stocks are generally considered undervalued but have a higher dividend yield. These stocks may not be doing well in the market currently but the fund managers may think that they have a potential for growth. Value funds do not give immediate returns but ensure safety of your capital and give good dividends. Dividends are given out only when the fund has made good profit. However, if certain stocks in the value fund gains market value, then the fund may start paying equity returns as well. Value funds are, therefore, focused on “perceived safety”. Important value funds in India are: L&T India Value Fund, Templeton India Equity Income Fund and ICICI Prudential Value Discovery Fund.

Difference between Growth Funds and Value Funds

The primary differences between growth mutual funds and value mutual funds are as outlined below:

  • The companies in a growth fund portfolio register higher earnings and market growth, while those in a value fund portfolio are likely to show a lower sales and earnings but give out higher dividends.
  • Because of the lower cost of the stocks that are part of a value fund, it may be cheaper to buy than a growth fund. Within the growth fund, large-cap funds would be costlier than other kinds such as small and mid-cap funds.
  • Growth funds are good for individuals who are looking for capital appreciation and steady long-term growth. People who want a regular income should go for value funds.
  • Growth funds give higher returns than value funds because your money is being reinvested regularly. In value funds, the investment is more or less stagnant until a dividend payout is made or any component company’s stocks see a capital appreciation. The value of the dividends depends on the value-hike of the stocks in the portfolio.
  • Value funds give you steady returns over a longer period of time, while growth funds could give higher returns both in the long-term and short-term.
  • During the times of recession, value funds tend to do better, or at least stay afloat longer, than growth funds.
  • Dividend payouts of value funds are done periodically depending on the performance of the fund, which ensures a steady profitable income for you. However, in growth funds, you need to either sell or redeem your investment to make profit.
  • Growth funds come at a higher risk than value funds. This is because growth funds are heavily dependent on the stock market and if the stocks crash at some point, the returns will take a hit.
  • The downside in growth funds is fluctuation of stock prices in the market leading to uncertainty in profits, while the risk in value funds is that the stocks that looked underpriced may turn out to be correctly priced and hence yield little profit.
  • Taxation in India is the same on both value and growth funds, depending on whether they are equity-dominated or debt-heavy. Equity funds are tax-free on long-term capital gains but debt fund gains are taxed at 20% with indexation and 10% without indexation. For short-term capital gains, equity funds have to pay a flat rate of 15%, while the gains from debt funds is added to a person’s income and taxed as per their income tax slab.

In an ideal investment portfolio, you should have both value funds and growth funds, in order to balance out the risks. Value funds add stability to your portfolio and growth funds allow your investment to grow. For investors looking to have a little of both without investing in separate funds, there are also hybrid or blended funds that offer the best of both the growth and value worlds.

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