If you’re investing in stock mutual
funds, you might hear the terms growth or value used to describe the investment style of the fund or the fund’s
manager.
Value
funds buy stock in companies that have financial problems, are
underperforming their potential, or are out of favor with investors.
Value funds seek out these stocks because their depressed prices can
make them a good value — provided the issuing company can stage a
comeback.
Growth funds, on the other hand, use an investing
style that concentrates on stock issued by new or small companies
that already have a strong upward momentum.
The strategy is to invest in companies with rapidly growing earnings
with the hope that they will continue to grow.
Because the stocks in growth funds tend to
be expensive — or have a high price-to-earnings ratio — growth funds are generally considered riskier than funds that
follow a value investing style. Value funds also tend to be less
volatile.
Both value and growth investing styles, which
can describe the approach of individual investors as well as fund
managers, can produce strong results — or falter — but
rarely at the same time. As a general rule, value investing tends
to pay off in bear markets,
when stock
prices are depressed, and
growth investing is an approach that works best in quickly rising bull markets.
