Value vs Growth Investing

Value investors look for companies whose share price is low compared with measures like profits, assets or cash flows. These companies may be out of favour because of a bad year, a sector slump or general pessimism. The value investor bets that, over time, the market will recognise the true worth and the price will rise.

Growth investors look for companies whose sales and profits are growing faster than average, often in expanding industries. They are willing to pay a higher price today because they expect profits to be much larger in future. The bet is that growth will continue long enough to justify the price.

Common measures include the price-to-earnings (PE) ratio, price-to-book ratio and dividend yield. A low PE may suggest a share is cheap, but it can also mean the business has problems. A high PE may suggest a share is expensive, or that investors expect strong growth. Numbers alone do not tell the whole story.

Our page on the Nifty PE ratio explains PE in simple words.

The biggest risk in value investing is the value trap: a share that looks cheap and keeps getting cheaper because the business is genuinely declining. Good value investors try to separate temporary problems from permanent ones, but it is not easy.

The biggest risk in growth investing is paying too much. If a company growth slows even slightly, its high price can fall sharply. Many popular growth shares have seen big drops when expectations were not met, even though the businesses remained good.

Over history, there have been long periods when growth shares did much better than value, and other periods when value led. These cycles can last years. Interest rates, economic conditions and investor mood all play a role. Nobody reliably predicts when the leadership will change.

Our page on bull and bear markets explains how market moods shift.

SEBI categories include value funds and contra funds, which follow a value-oriented or against-the-crowd approach. A fund house can offer one or the other, not both. These funds suit investors who are comfortable with periods of lagging the market.

Our page on value and contra funds explains them.

There is no separate SEBI category called "growth fund". Many flexi cap, large cap, mid cap and focused funds follow a growth-leaning style. The fund document and fact sheet usually describe the manager approach. Do not confuse this with the "growth option" of a fund, which simply means profits are reinvested instead of paid out.

Our page on growth versus IDCW option explains that difference.

Many managers follow a blend approach, combining value and growth ideas, sometimes called "growth at a reasonable price". Index funds hold the market as it is, so they contain both styles automatically.

Our page on index funds explains how they work.

Some index-based funds follow specific factors like value, momentum, quality or low volatility, using rules rather than a manager judgement. These can give targeted style exposure, but they also go through long phases of under- and over-performance.

Our page on factor and smart beta funds explains them.

For most long-term investors, betting heavily on one style is unnecessary. Holding a diversified core fund, or combining styles, smooths out the cycles. If you do choose a style fund, do it for a part of your equity money, and be ready to hold through periods when that style is out of favour.

Our page on diversification explains why spreading helps.

A value fund and a growth-leaning flexi cap fund may still hold some of the same large companies. Check top holdings before adding funds, so you get real variety rather than duplication.

Our page on portfolio overlap explains how.

A common mistake is to buy whichever style did best recently, just as it may be about to cool. Switching between styles frequently often means buying high and selling low. Pick an approach that fits you and stay with it.

Our post on why your friend fund did better explains why recent results mislead.

Growth companies are valued largely on profits expected far in the future. When interest rates rise, those future profits look less valuable today, so growth shares can fall more. When rates fall, growth shares often benefit. Value shares, which earn more of their profits now, can hold up better when rates rise. This is one reason the two styles take turns.

Our page on time value of money explains why future money is worth less today.

Read the scheme information document and the fact sheet. Look at the fund average PE compared with the benchmark, its top holdings, and how the manager describes the approach. A fund with a much lower PE than its index usually leans to value; a much higher PE usually leans to growth.

• Value: buys what looks cheap.
• Growth: buys fast-growing companies, often at higher prices.
• Both have long good and bad phases.
• Many investors mix styles or use a flexible core fund.

We are distributors rather than investment advisers and we recommend no schemes. If you want help understanding the style of the funds you hold, get in touch.