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'Growth' vs 'Value' funds: Difference and which is better?

Adopting a blended approach can help you mitigate risk

Value funds vs growth funds: Difference and which is better?

How are 'growth' and 'value' funds different? Which one should one choose? - Yogesh

Most mutual funds have a distinct philosophy when it comes to picking stocks. Some follow the 'growth' style, while some adhere to 'value'.

'Growth' investing invests in companies with the potential for faster-than-average growth. Given their perceived higher potential, these stocks are often available at a higher price (premium).

Value funds, meanwhile, look for undervalued stocks that can appreciate.

Typically, growth stocks boast higher-than-average valuations. You can check a stock's valuation by looking at price-to-earnings (P/E) and price-to-book value (P/B) ratios.

Conversely, value funds look for companies with a lower P/E ratio when compared to their competitors.

For example, Axis Mutual Fund is known for its growth style of investing across its equity funds, as evidenced by the P/E ratio of Axis ELSS Tax Saver Fund , which stood above 37 as of January end, compared to the category average of 25. At the other end of the spectrum lies Tata Equity PE Fund . Following a value investment strategy, the average P/E of the fund's portfolio is below 15.

That said, growth and value are fluid in nature. When a value stock's true worth is recognised, it no longer remains undervalued. Similarly, if a growth stock stagnates or undergoes a significant share price decline, it may acquire value characteristics.

How to check a fund's investment style?

While SEBI, the markets regulator, has defined a specific category for 'value funds,' there's no universal definition of what constitutes a 'value' purchase. The definition of a value purchase varies based on individual perspectives.

Which is why when you search for any fund on Value Research, under the 'Portfolio' tab, you'll find a style box titled 'Fund Style'. This box indicates whether a fund leans towards growth or value investing style. A fund falling in the middle means it adopts both styles while picking stocks .

Growth vs Value: The better choice?

The performance of 'value' investment style has surpassed 'growth' in recent years. Before that, growth was the more dominant one. Which means that neither style offers guarantees of consistent success.

Therefore, you should diversify your portfolio across both styles or select funds that blend both. It will help you mitigate the risk of significant losses during market downturns.

Also read: Where to invest more to save on taxes?

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