Growth or value funds: Which route to take?

Two approaches

When it comes to stock picking, some mutual funds follow the ‘growth’ style, while some adhere to ‘value.’

Their key difference

These styles differ in how they view and prioritise valuations.

What is growth investing?

Growth’ investing involves picking stocks with potential for faster-than-average growth. Given their perceived higher potential, these stocks are available at higher valuations.

Example

Axis MF is known for its growth style of investing across its equity funds. Take the instance of Axis ELSS Tax Saver Fund. Its P/E stood at 37 compared to the category avg of 25.

What is value investing?

It involves picking undervalued stocks that can appreciate. Value funds look for companies with a lower P/E ratio when compared to competitors.

Example

Tata Equity PE Fund follows a value investment strategy and its average portfolio P/E is below 15.

Growth and value tend to shift over time

A stock that was once a value pick can stop being undervalued when more investors come to notice it. If a growth stock stagnates or plummets, it may acquire value characteristics.

Which has performed better?

The performance of ‘value’ funds has surpassed ‘growth’ in recent years. But before that, ‘growth’ was the most dominant one. So, neither style guarantees success.

Our take

You should diversify your portfolio across both styles or select funds that blend both styles.

Checking a fund’s investment style

On searching for a fund on Value Research, under the ‘Portfolio’ tab, you’ll find a box titled ‘Fund Style’. It indicates if the fund follows a growth or value style, or both.

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