When examining a list of mutual funds, you might find the word “growth” or “value” in some of the titles. Have you wondered what these labels mean? Shouldn’t all funds pursue these objectives?
The terms growth and value reflect different investing styles. Generally, when a mutual fund has one of these words in the fund’s name, the fund manager utilizes that strategy to choose specific stocks for the fund’s portfolio. You might use growth and value strategies when selecting investments for your portfolio, but analyzing specific stock data can take time and requires experience and expertise.
As the name suggests, growth stocks are associated with companies that appear to have above-average growth potential. These companies might be on the verge of a market breakthrough or acquisition, or they may occupy a strong position in a growing industry.
Growth companies typically do not pay dividends and are more likely to reinvest profits. Investors hope to benefit from future capital appreciation of growth stocks, which tend to be considered higher risk than value stocks. However, it’s equally important for growth and value stocks to have strong fundamentals.
Value stocks are associated with companies that appear to be undervalued by the market or are in an industry that is currently out of favor. Unlike growth stocks, which might seem expensive and overvalued, value stocks may be priced lower in relation to their earnings, assets, or growth potential.
Established companies are more likely than younger companies to be considered value stocks, and these firms usually pay dividends rather than reinvest their profits. An investor who purchases a value stock typically expects that the broader market will eventually recognize the company’s full potential, which may result in rising share prices. One risk with this approach is that a stock considered to be undervalued because of legal or management difficulties or tough competition might not be able to recover from the setback.
A Way to Diversify
Holding growth and value stocks and/or mutual funds is one of many ways to diversify your portfolio. Over the past 20 years, the average annual return for value stocks was 1.59% higher than that of growth stocks (10.45% versus 8.86%). Yet growth stocks outperformed value stocks in eight of those 20 years, and in some years the performance difference was wide (see chart). This suggests that growth and value stocks may respond differently to varying market conditions. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
The return and principal value of all stocks and mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.