The decisions on the type of stock mutual funds to invest in can be quite difficult. This is due to the fact that different stock may have high returns, low returns, high risks, and low risks. While both value and growth funds are great investments, it is important to understand each one of them in terms of the risks involved, yields, dividend payoffs and even the period it might take before the invested amount is recovered.
What is Growth Funds?
These are stocks of a company that has a high expected growth rate in relation to the previous year’s performance. They are, however, priced higher than other funds due to the high probability of high yields. They also have records of high earnings irrespective of harsh economic conditions. One downside, however, is the high risk involved. This is because the prices could fall at a high rate due to factors such as negative news regarding a company.
Growth funds come in portfolios such as large, small, mid, micro capitalization and diversified equity funds. While large-cap growth funds have high growth record and invest in the biggest players in the economy, small and mid-cap funds incorporate small and medium players that have a high possibility of growth.
What is Value Funds?
These are stocks for companies that new or under-performing firms. They sell at low prices in relation to a company’s performance, hence carry less risk to an investor. Although the stocks may be undervalued, they have a higher dividend yield but are only given when good profits have been recapped.
Similarities between Growth Funds and Value Funds
- Both are types of stock funds
Differences between Growth Funds and Value Funds
Definition
Growth funds are stocks of a company that has a high expected growth rate in relation to the previous year’s performance. On the other hand, value funds are stocks for new or underperforming firms.
Returns
Growth funds have higher returns. On the other hand, value funds have low returns.
Risk involved
While growth funds are more riskier, value funds are less risky.
Period of returns
Growth funds give higher returns both in the short term and long term. On the other hand, value funds give steady returns in the long run.
Dividends payoffs
While growth funds gain profit by selling or redeeming investments, value funds are paid periodically via dividends depending on the performance.
Entity portfolio
While the companies in growth fund portfolios have a higher market growth and higher earnings, the companies in value funds’ portfolios have lower sales hence lower earnings.
Cost of purchase
Growth funds are expensive hence the cost of purchase is high. On the other hand, value funds are inexpensive hence cheaper to buy.
Ideal target market
While growth funds are ideal for persons interested in steady long term growth and capital appreciation, value funds are ideal for persons who are looking for regular income flow.
Growth Funds vs. Value Funds: Comparison Table
Summary of Growth Funds vs. Value Funds
While both growth and value funds are great investments, they may be different in various ways. While growth funds give higher returns in the short and long run, value funds give good returns in the long run. Growth funds are also more risky, despite the fact that they give better yields. Value funds, however, are less risky, with low yields.