Growth v/s Value Investing: Which Is Better Of The Two In Current Times? - Outside View by PersonalFN

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Growth v/s Value Investing: Which Is Better Of The Two In Current Times?
Jun 12, 2019

One of the most important tasks of a mutual fund manager is the selection and management of the stocks within a particular scheme. The selection process involves extensive research and evaluation, and if carefully done, it can appreciate the investor's wealth.

Fund managers usually follow a particular approach while selecting stocks for a mutual fund scheme. This investing approach can either be growth or value based.

Growth-based investing

This approach involves looking for companies that have the potential to grow faster in terms of revenue, profits, etc. as compared to others. The reasons for increase in growth could be:

  1. The companies may have an interesting line up of products or
  2. New product launches that may receive good acceptance in the market or
  3. They may have other growth opportunities, which are unavailable to the competitors.

As the growth rate is higher, they tend to outperform the benchmark during a bull run and in times of economic growth. However, stocks are more volatile because any positive or negative news (global or national events) can significantly affect their prices.

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Investors are even willing to pay higher prices for such stocks when they anticipate higher growth and therefore, the valuation ratios (Price to Earnings, Price to Book value) are higher too.

The focus here is on growth, so there would be minimised or no dividend payout.

Most of the available schemes follow the growth approach. Growth opportunities are higher in small-cap, mid-cap, and multi-cap funds, and to a limited extent in large-cap funds.

Value-based investing

In contrast, the value approach looks to pick undervalued stocks, i.e. the stocks' current market price is lower than its intrinsic value, with strong fundamentals.

The stocks could be undervalued because a large number of investors may have not yet discovered them, or there could be a misperception about the company due to recent events.

Actually, fundamentally strong companies are most likely to overcome any hurdles over time and their prices will begin to reflect their actual worth.

These stocks tend to do well during periods of economic recovery, but it may not appreciate much during an extended bull run. They are also less volatile as compared to growth stocks.

Investors turn to value-based investing when they are looking for a reasonably priced stock with good appreciation potential. Thus, the valuations for such stocks are low.

Value stocks generally have higher dividend payout. Therefore, even if the capital appreciation may not be high, investors benefit from the dividend payment.

Funds which follow the value-based approach can be identified through their names as they have the word `value' mentioned in them. Value stocks can be discovered in all three types of market cap - small, mid, and large-caps.

[Read: Will Value Investing Be The Flavour Of The Year 2019?]

Which is better?

Markets are currently trading at all time high and many stocks are expensive. If corporate earnings fail to grow, we might experience correction in the prices. If that happens, value stocks may become a better proposition.

However, if corporate earnings grow, both growth and value approach will provide good opportunities.

Both approaches have their advantages, but it is important to note that a stock cannot remain a growth or value pick forever. A growth stock will cease to be a growth stock when the growth reaches its optimum or if it fails to grow to its potential. Similarly, a value stock will not remain so once its value has been realised or if its value is no longer able to appreciate.

Growth-based approach is mainly suitable for investors looking to clock high returns by investing in volatile assets for medium to long-term and are ready to pay higher price for it.

Value-based approach can be considered if you are looking to invest in inexpensive stocks that can appreciate your wealth over long-term along with dividend payments.

As an investor, you can create a portfolio having a mix of growth-based funds and value-based funds and opt for Systematic investment plan (SIP) to invest regularly. You will benefit by getting favourable returns across market phases. Your downside risk will also reduce if one approach earns you higher returns while the other fails to generate meaningful returns.

Before selecting funds, make sure that you have clearly defined your investment objective, risk profile, and time horizon. Additionally, you should stay invested for the long-term to counter short-term fluctuations so you get higher returns over time.

Selecting the right funds and being patient with your investment will be a rewarding strategy for your overall financial health.

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Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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