Growth Funds vs. Value Funds: What's the Difference?

Many types of stock mutual funds exist. The two main styles are growth funds and value funds. The key differences between the two are the rate of growth and the level of volatility. Here's what to know when it comes to growth funds vs. value funds.

What's the Difference Between Growth Funds and Value Funds?

Type of Investment

Growth stock funds hold stocks in growth companies. They are expected to grow at a rate faster than the overall stock market. Growth stocks may also be called "aggressive stocks," because they tend to have relatively high risk. They also have relatively higher performance compared to the broader market indices.

Growth funds often (but not always) have the word "growth" in their names. For instance, there are the Vanguard Growth Index (VIGAX) and Fidelity Growth Company (FDGRX).

Technology stocks, such as Apple (AAPL) and Meta (FB), formerly Facebook, are the types of companies that growth stock mutual fund managers buy for their portfolios, but they don't only buy large-cap stocks. They also add promising small- and mid-cap growth companies that are not household names to their portfolios, and those might be the next big growth companies.

Value stock mutual funds invest in value stocks. An investor believes that these stocks are selling at a lower price in relation to earnings or other value measures. In simple terms, a value investor or fund manager looks for stocks selling at a "discount," looking for a bargain.

Dividends Paid

Growth funds pay little or no dividends. The return to the investor comes through the price appreciation of the underlying investments. The return to the investor for value/income funds can be a combination of price appreciation and yield (dividends).

The most common purpose for using value funds is for income or yield, used when you want or need dividend payments as a source of income. That is why value funds are often referred to as "income funds." People who are retired are the most common investors in value funds for the income feature.

Returns

Value investors or managers often employ the fundamental analysis approach, which is a way to research and analyze companies to decide whether a stock(s) should be purchased. It's used to see whether the stock is a "good value."

Instead of doing all of the research and analysis, one effective means of gaining exposure to value stocks is to buy a mutual fund with a value goal. Most value stock funds have the word "value" in their name. They include Vanguard Value Index (VVIAX) and Fidelity Value (FDVLX).

Value fund investors may also choose to have dividends reinvested to buy more shares of the fund. This strategy is common for people who like value investing but do not need current income. Instead, they want to grow their investment portfolio. They purchase value stock funds for the purpose of long-term growth, although the name or goal isn't literally "growth."

Growth stocks can outperform value stocks, but a study by Fidelity shows that value stocks outperformed growth stocks for the 26-year period between 1989 and 2015.

Risk

Growth and value are different styles of investing in stocks. The growth style tends to have a higher degree of market risk with greater potential for higher returns than value investing. Yet, growth has not consistently outperformed value in the long run. You may choose a combination of growth and value for a diversified portfolio by investing in an index fund that tracks a broad market index, such as the S&P 500.