Differences Between Growth and Value Style of Investing

Posted On Friday, May 25, 2018


Equity mutual funds follow two styles of investing Growth and Value. What is the difference between these two? What does it mean for new investors in terms of risks, returns or other factors? (This is also asked to us by an attendee during a recent Path to Profit event) To build an equity investment strategy and a portfolio to accommodate your personal investing objectives, it is important to know the difference between the growth and value styles of investing.

Growth style of investing is followed by those funds that invest in companies which are expected to grow faster than other companies in the future (by way of profits earned, revenues and/or cash flows). High-growth companies are typically in rapidly changing industries in which they must continually re-invest profits in order to maintain or grow their market position. This which can lead to a compounding effect over time that generates tremendous returns. Such companies offer higher potential, but that rapid change could work against them just as quickly if they invest incorrectly, so growth companies are typically riskier in nature. There may be little or no earnings today, but growth investors tend to pay more attention to a company's future earnings potential instead of focusing on a seemingly high valuation on the most recent earnings and cash flow figures.

Key characteristics:
- More Expensive: Growth funds may be seen as expensive and overvalued. Their underlying stock prices tend to be high relative to their fundamentals such as sales, profits and dividends, since growth investors believe a company's fundamentals will increase more rapidly in the future and justify what seems like an expensive stock price today.

- Lower Margin of Safety: In frothy markets, investors in growth funds experience price swings in greater magnitude. Such funds are best suited for investors who are risk tolerant and have a longer time horizon.

Value style of investing is followed by those funds that invest in companies whose stock prices don't reflect their underlying worth, sometimes referred to as "intrinsic value." Value investors believe that such stocks are selling at a price that is lower in relation to current earnings or assets or other fundamental value measures. Typically stocks that are selling at lower multiples of earnings or other measures have had temporary setbacks in their business, or are in industries with lower growth outlooks and is considered more 'boring,' so to speak. While the businesses may be boring at times, the resulting neglect from the market can create massive "mispricing" opportunities, and value investors bet that as time goes on, the market will properly recognize the company's true value and the price will rise.

Key characteristics:
- Less Expensive: Their underlying stock prices are low relative to their fundamentals such as sales, profits and dividends.

- Higher Margin of Safety: Because value investors typically pay a lower price for stocks (in terms of multiple of earnings or cash flow, etc.), the stocks tend not to be hit as hard when the earnings outlook changes a bit. With growth companies, on the other hand, small changes to the growth outlook have an outsized effect on the value of the firm because just slightly lower growth now considerably brings down the earnings numbers several years down the line - which is what those growth investors are paying for in the first place.

So while there is no right or wrong in these two types of investments, at Quantum we follow the value style of investing. Our equity funds including Quantum Long Term Equity Value Fund chase value stocks. To know more about our investment philosophy click here.

Product Labeling
Name of the SchemeThis product is suitable for investors who are seeking*Riskometer
Quantum Long Term Equity Value Fund

(An Open Ended Equity Scheme following a Value Investment Strategy)
• Long term capital appreciation

• Invests primarily in equity and equity related securities of companies in S&P BSE 200 index
Quantum Long Term Equity Fund
Investors understand that their principal will be at Moderately High Risk
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

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