If you invest in stock mutual funds, you may have to choose between growth and value funds. Both types of funds seek to give you growth through the ownership of stocks (or equities), but in different ways. So what is the difference between growth and value funds?
Briefly, growth mutual funds are called that because they’re made up of mainly growth stocks. Value mutual funds, on the other hand, are made up of mainly value stocks.
Ed Bowsher of MoneyWeek gives a more detailed explanation on the differences between growth and value stocks, in the following YouTube video. Near the end of the video he discusses his outlook for the future; I suggest you ignore the part about the immediate outlook from June 2014 (when he made the video) and focus more on his strategy for the longer term:
As we’ve noted in an article about stock mutual funds (also called equity mutual funds), they provide the best growth of all fund types.
Bond funds and money market funds, to name two others, give you safety; they’re designed to protect capital and as such, are not good growth candidates.
We could live with that perhaps, except that inflation will gobble up any returns you receive on these funds. Non-registered (taxable) bond and money market funds may face a double whammy: inflation and taxation, which could lead to negative returns.
In other words, stock funds are a must for just about everyone’s investment portfolio.
Getting back to growth versus value, you’ll find arguments on both sides, often compelling arguments. Don’t get too wound up in those claims and counter-claims. Instead, consider a growth or value label one more piece of information you can use as you assess how well any individual fund fits your unique needs.