When it comes to Equity Mutual Funds, they primarily follow two types of investment approaches, namely, Growth and Value Funds in India. The Growth Funds tend to be a little more aggressive and risky compared to Value Funds. However, both have the potential to offer better returns in long run. Both styles of investing do well in different market cycles. Growth generally tends to do well in a bull market, where valuations are high and indices are rapidly moving up. When the market is not moving at a rapid pace and there is broad-based growth and other positive economic factors, a value fund generally tends to do better.
What is the meaning of Value Funds?
In Value funds, fund manager tends to invest money in stocks of companies which have good balance sheets; the financials are well consolidated. The cost price of the stock is not at a higher PE (Price to Equity) level. These companies are usually the ones that fall under the large-cap category. They have the potential to protect your investment against the downside risks of the market, thus offering a margin of safety.
Growth Style of Investing:
In the growth style of investing, fund manager chooses to invest in stocks that are doing better and display a promise or an indication to do even better in the near future. In the growth style of investing, fund manager generally tends to ignore the price or the PE value of the stock. These choices are mainly made based on the prevalent trends and market movements.
Markets are cyclical in nature. Whenever there is an ecosphere for value to do better, Value funds performs better. Factors such as GDP growth, earnings potential, etc., act as tailwinds and drive value style to optimal performance.
Investors should not worry about which style of investment to choose from. If one closely observes the market, one will be able to identify the trend and allocate to the prevailing style of investment.