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 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:
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:
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:
The primary differences between growth mutual funds and value mutual funds are as outlined below:
Criteria | Value Investing | Growth Investing |
Bets On | Market Psychology | Projected Future Profitability |
Holding Time | Long-Term | Short-Term to Long-Term |
P/E Ratio | Low | High |
Dividend Payout | Low | High |
Growth Potential | Low to Moderate | High |
Company Size | Large | Small to Mid |
Company Type | Matured | Young |
Time Period | Russell 1000 Value Index (Annualised Returns) | Russell 1000 Growth Index (Annualised Returns) |
1979 – 2020 | 12% | 12.1% |
2009 – 2020 | 10.7% | 21.2% |
2000 - 2008 | 0.5% | -5.4% |
1989 – 1999 | 15.8% | 22.5% |
1979 – 1988 | 14.9% | 10.9% |
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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