Many types of stock mutual funds exist. The two main styles are growth funds and value funds. The key differences between the two are the rate of growth and level of volatility. Here's what to know when it comes to growth funds vs. value funds.
What's the Difference Between Growth Funds and Value Funds?
|Type of Investment||Aggressive||Less aggressive|
|Dividends Paid||little or none||Combination of price appreciation and yields|
|Returns||Expected to gain faster than the stock market overall||Historically performs better than growth funds|
Type of Investment
Growth stock funds hold stocks in growth companies. They are expected to grow at a rate faster than the overall stock market. Growth stocks may be called aggressive because they tend to have relatively high risk. They also have relatively higher performance, compared to the broader market indices.
Technology stocks, such as Apple (AAPL) and Facebook (FB), are the types of companies growth stock mutual fund managers buy for their portfolios. But they don't all buy such big, large-cap stocks. They also buy small- and mid-cap growth stocks of companies that are not household names. These could be the next big growth company.
Value stock mutual funds invest in value stocks. These are stocks an investor believes are selling at a price that is low in relation to earnings or other value measures. In simple terms, the value investor or fund manager looks for stocks selling at a "discount." They want to find a bargain.
Growth funds pay little or no dividends. The return to the investor comes through the price appreciation of the underlying investment. The return to the investor for value/income funds can be a combination of price appreciation and yield (dividends).
Stocks and stock funds that pay dividends are often called value funds. Those that pay little or no dividends are growth funds.
The most common purpose for using value funds is for income or yield. It's when you want or need dividend payments as a source of income. This is why value funds are often referred to as "income funds." Retired people are the most common investors in value funds for the income feature.
Value investors or managers often employ the fundamental analysis approach. This is a way to research and analyze companies to decide if the stock(s) should be purchased. It's to see if the stock is a "good value."
Instead of doing all the research and analysis, an effective means of gaining exposure to value stocks is to simply buy a mutual fund with a value goal. Most value stock funds have the word "value" in their name. These include Vanguard Value Index (VVIAX) and Fidelity Value (FDVLX).
Value fund investors may also choose to have dividends reinvested to buy more shares of the fund. This strategy is common for people who like value investing but do not need current income. Instead, they want to grow their investment portfolio. They purchase value stock funds for the purpose of long-term growth, although the name or goal isn't literally "growth."
Growth stocks can outperform value stocks. But a study by Fidelity shows that value stocks outperformed growth stocks for the 26-year period between 1989 and 2015.
Growth and value are different styles of investing in stocks. The growth style tends to have a higher degree of market risk with greater potential for higher returns compared to value investing. Yet growth has not consistently outperformed value in the long run. For a diversified portfolio, you may choose a combination of growth and value, You can achieve this by investing in an index fund that tracks a broad market index, such as the S&P 500.
The Bottom Line
- Growth stock funds hold growth stocks. These are relatively high risk and are expected to grow faster in relation to the market.
- Value stock funds mainly invest in value stocks. These sell at a low price in relation to earnings or other value measures.
- A study by Fidelity shows that value stocks outperformed growth stocks for the 26-year period between 1989 and 2015.
- For a diversified portfolio, consider investing in index funds that track a broad market index, such as the S&P 500.