Introduction
Value and growth investing are the two most popular investment strategies. While some investors prefer one over the other, others diversify their portfolios to include both value and growth stocks/mutual funds.
So, should you include both in your portfolio or stick to one? To find the answer, you need to understand the differences between value and growth investing. Read on to learn about value investing vs growth investing and make an informed choice.
What is Value Investing?
Value investing is a relatively risky strategy employed by expert investors. If you consider yourself a value investor, you will evaluate an underperformed stock or mutual fund on various parameters and enter when the price is low.
The factors that value investors evaluate include price earning ratio, outstanding debt, management strength, Quarter-on-Quarter or Year-on-Year financial growth, cash reserves, Earnings Per Share (EPS), etc. The idea is that if a company's underlying value is high, big investors will soon recognise its potential or worth and invest in the stock.
Value stocks may languish for several reasons, including but not limited to economic factors, legal issues, consumer trends, cyclical nature, etc. Since these stocks have less buyer-seller participation, they are often less volatile than growth stocks.
While there are thousands of low-priced or penny stocks on the bourses, not every stock is a value stock. Hence, you need to be careful while investing in a low-priced stock.
Picking value mutual funds are relatively easier than picking stocks. Mutual funds generally follow the benchmark and may outperform or underperform the benchmark by a margin. Since the benchmark is mostly a collection of stocks or money market instruments, it is easy to predict the future direction and place a bet.
For example, mutual funds tracking the pharma sector mostly gave inferior returns until early 2020. But, when they picked pace, they left many other mutual funds behind. As a fact, many pharma mutual funds remained at the same level between 2017 and 2020 and doubled or more than doubled between 2020 and 2021.
Hence, value investing can give you insane returns provided you pick the right stocks or invest in the right mutual funds and have the patience to endure no-movement days or months.
What is Growth Investing?
Growth investing is much like value investing, except that growth investors do not run after penny stocks. Growth investors evaluate parameters like revenue growth, cash flows, and Profit After Tax (PAT), besides analysing the balance sheet, to pick companies with above-average potential for growth.
While value investors mostly scour for small-cap stocks, growth investors scan large-cap, mid-cap and small-cap stocks. Growth stock usually refers to companies with robust business potential, primarily because they market innovative products or services at unparalleled prices. Growth stocks grow at a steady pace, prompting investors to believe and invest in their growth story.
Growth stocks are usually pricier than their peers, and this is because their EPS and price-earnings ratio are higher than most other companies in the segment.
Growth mutual funds invest in growth stocks. Unlike value funds, these funds can be easily located. Brokerage platforms like 5paisa display the best growth mutual funds on their home page. You can compare the top growth funds and invest according to your risk appetite.
Value Investing vs Growth Investing - Which is Better?
Whether to invest in growth or value stocks depends on your risk profile and stock/mutual fund selection.
Generally, growth stocks would appeal to you more if you agree to the following statements:
- You don't need a regular income - Growth companies usually shy away from giving dividends since they invest surplus cash for business development purposes. Hence, if you do not need a regular income from your investment, growth stocks will suit you more.
- You are not afraid of volatility - Since the investor participation in growth stocks is higher than value stocks, they often swing wildly on either side. While an upswing can make you happy, brace yourself for the downswings and keep a contingency plan ready.
- You don't need the money anytime soon - Stay away from growth stocks/funds if you have a short-term investment horizon. Growth stocks may pass through several upswing and downswing cycles before eventually giving you the returns you desire.
In contrast, value stocks might appeal to you more if the following statements resonate with you:
- You want a regular income - Most value stocks offer hefty dividends to attract investors. Hence, if a high dividend income attracts you, you must invest in value stocks.
- You dislike volatility - Until investors understand the potential of the stock, they won't invest in a value stock. Hence, the stock might be less volatile. But, low volatility also means less profit.
- You have low capital - Growth stocks are often more expensive than value stocks, a reason why entry-level investors prefer investing in value stocks.
The EndNote
By now, you may have become more equipped to handle the value investing vs growth investing debate better. Open a Demat account with 5paisa and put your knowledge to good use. 5paisa publishes the best stock recommendations to make you an expert in identifying high-value and high-growth stocks and mutual funds at ease.