Value vs. Growth -Which Type of Fund is Right for You?

So you’re interested in investing some money and you’ve decided to go via the route of Mutual Funds.  Don’t be intimidated by big words and fancy terminology just yet, as there are different types of funds that require your attention first, like Value Funds and Growth Funds . Since each type of fund will yield completely different results, you’ll need to have a general idea of what your financial goals are (if you have a lot of time for your investments to sit or just a year or two) before you hand over a dime to any financial advisor or company. Here’s a bit of insight into the differences between the two.

Value Fund

A Value Fund has a focus on various companies that may not be doing so well in the stock market.  These companies are typically quite reputable and merely overlooked for one reason or another by investors, or may be going through a positive change or event, or perhaps it’s one of those ‘typical” companies in industries like energy or banking. 

The theory behind these types of funds is that since the companies at hand have lower than average stock prices compared to their earnings, the end result will be “better-than-expected” once the market smiles upon them again.  The return on investment is hopefully quite significant, as once the market realizes that these stocks are under-priced, everyone and their grandmother will buy them, thus forcing this particular stock’s price to go up (and so will the value fund).

Growth Fund

If you can stand to watch your fund’s value drop one day and then increase the next, a Growth Fund might be just the added bit of uncontrollable excitement that you’ve been searching for in an investment. Since growth funds have their focus more on the long-term, you can’t be the type of person that loses sleep at night if you’re investment lost money today- because it probably will, but it will probably also make up for it tomorrow.

Growth Funds invest in the stock of companies that are fast-growing (technology, healthcare) or are already established, as these are the types of businesses that are more likely to produce over the long-term. These funds are based completely on the ups and downs of the stock market- hence, all the talk about being up one day and down the next.

What History Tells Us

Historically speaking, Value Funds have done better than Growth Funds during an economic expansion. On the other hand, Growth Funds have out-performed Value Funds during an economic slowdown.  If you think about, it makes sense because when the economy slows, people tend to panic a bit and focus on the necessities (healthcare) and buy what they feel secure with (the well-established companies that have been around for a while).  But when the economy is growing, folks will begin to look around and try new things, like the little, under-rated stocks in a Value Fund. 

But more important than anything, if you invest in something that is going to keep you up at night, or make you think that you made a bad decision, it’s not a wise idea.  This is your money- your nest egg- for you to do with what you choose, and it shouldn’t ever make you lose sleep.

Growth vs. Value

Historically speaking, growth and value investments tend to react differently during the economic cycle. Since value stocks are often cyclical in nature, they may benefit from the increased spending that usually occurs during and economic expansion. Growth stocks may also perform well during an expansion, but they usually prosper during a slowdown of the overall economy. So both investments play an important role in a long-term portfolio.

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