Mutual fund managers of different investment schemes have adopted diversified investing styles to provide investors with a wide selection of investment options. These styles allow fund managers to allot the corpus efficiently under different funds. Based on the investing patterns, we have growth funds, contra funds, and value funds. Here we will discuss value mutual funds, essential aspects, and features.
What are value funds?
SEBI has categorised value funds that follow the value investment strategy in selecting stocks for portfolio investment.
To understand value funds, we must first understand the philosophy of value investing and how it is different from other mutual fund investments.
Value investors select stocks currently trading at a lower price than their intrinsic value or deemed undervalued stocks based on fundamental analysis. Value investing is often viewed as opposite to growth investing which focuses on investing in emerging companies with high potential to grow.
So, what are value mutual funds?
Value funds are mutual funds where fund managers invest in stocks that are currently undervalued. The premise behind the strategy is that their value will increase in the future once the market realises their actual potential, and investors will gain from value appraisal. Value stocks are often from well-established companies offering dividend payments to investors.
Value investing was followed by notables like Warren Buffet, Benjamin Graham, etc. Investors select stocks based on fundamental analysis and intrinsic value.
It suggests that the market sometimes fails to discover the actual price of stocks due to inherent inefficiency, allowing companies to sell them below their correct price. When the market corrects itself, the value of these stocks will go up, creating the massive potential for capital gain.
Value stocks don’t look attractive when compared to the value of growth stocks. But these stocks have great potential for growth in the long run. Hence, invest in value funds only when you have a long investment horizon. The fund managers expect to earn exponential returns from these stocks when their value rises in the long run.
Factors to consider before investing in value mutual funds
Investors preferring value mutual funds must keep the following in mind. We suggest that one also look at the past performance of the fund before selecting.
Past performance: Past performance is critical for selecting value funds. Often potential investors look at the past five years’ track record to determine whether the fund manager had achieved the fund’s objective through various market cycles. It will help you analyse whether the fund is a good selection for your portfolio or not.
Investment horizon: Usually, financial advisors suggest that you stay invested for at least 3-5 years in equity funds for good returns. Equity funds generate returns over a prolonged investment period. Having a long investment horizon is essential for value stocks to realise their potential since fund managers pick up undervalued stocks. These factors take time to correct themselves, and hence, patience is necessary while investing in value mutual funds.
Consider diversification: Fund managers have the flexibility to select stocks of large-cap and small or mid-cap funds to generate returns. Unless you are looking for exposure to a particular sector, choose funds that offer diversified investment options across different market caps and sectors. Diversification is critical for equity investment to mitigate risk exposure and improve the performance of a portfolio.
Who should invest in value mutual funds?
Investors of value mutual funds must keep two factors in mind – time horizon and risks involved.
Time horizon: Fund managers select value stocks that are currently underpriced. So, it may take some time for these companies to reach their correct price. These stocks are from companies with solid fundamentals to grow in the long run. Hence, unlike growth funds and debt funds, value funds will produce results over a time period.
Risks: Investors need to appraise themselves on the risks involved. Value funds often invest against ongoing market trends in stocks that are currently not popular. Hence, investors need to understand that earning returns from these companies will take a long time and might even result in significant losses if they fail to achieve anticipated value.
Why should you invest in value mutual funds?
Value funds are excellent for diversifying your portfolio. Stocks are selected after solid research and hence, are less volatile than growth stocks. Since these shares are trading below their correct price, there is less chance for their value to dip further during a downtrend.
These are quality stocks, often including companies with dedicated dividend distribution programs. These companies exhibit solid fundamentals and financials to record strong growth in the future.
When investors seek value stocks, they usually look for low-price investments in terms of net current assets, earnings, and sales, against other funds that involve growth stocks and invest in equities with healthy revenues and lesser weight on the stock price. Value investors know that these stocks can underperform during a bull market and even go out of favour. But they also have the potential to generate market-beating returns when the speculations are correct.
– Value funds invest following the principles of value investing, which many successful investors follow.
– Value investors believe that the market sometimes fails to price stocks, causing them to trade at low prices.
– Fund managers select stocks selling lower than their intrinsic value.
– Value stocks have strong fundamentals and the potential to perform in the long run.
– Value stocks are often from well-established companies with structured, regular dividend payout schemes.
– Value funds require investors to stay invested over a long horizon and ride over business cycles.
– The performance of the fund manager is crucial for the success of a value mutual fund.
– Investors must research the fund’s past performance to understand if the fund is performing to meet investment objectives.
– These funds offer portfolio diversification with a wide range of stocks across market capitalisationand sectors.
– These funds are suitable for investors aware of the macro trends.
– Check the fees associated with mutual fund investment as the expense ratio can lower your actual returns.
Benefits of value funds
– With value mutual funds, you can invest in a diversified portfolio.
– Since the selection of stocks is based on strategy, they are less vulnerable to significant market swings.
– Investment spreads across all economic sectors that are overlooked, bringing focus to them and improving market confidence.
– Value stocks invest in company shares trading lower than their intrinsic value without worrying about market performance.
– Value investors don’t follow the mob mentality. Instead, they base their decisions on fundamental analysis. This approach makes value investors the most successful investors of all time.
Value funds are equity funds that invest in company shares that are currently trading below their intrinsic value. Value funds appeal to aggressive investors, prepared to invest for a long horizon. If you select a value mutual fund for your portfolio, ensure that it fits your overall financial goals, as these would take time to generate returns. You can choose lump sum investment or SIP as your preferred mode of investing in these funds.
The purpose of this article is to educate investors and help them make informed investment choices. We hope it has helped clear your doubts about value mutual funds. You can research more interesting topics on our website. To receive daily market updates, subscribe to our blog.
What are value mutual funds?
Value-oriented mutual funds invest in equity shares following the theory of value investing, where fund managers invest in stocks that are trading at a price below their intrinsic value. These stocks would deliver long term growth. The fund managers select potential stocks strategically and carry low downside risks. Since these are already low value, these stocks are less impacted by the bearish market.
How long should I remain invested in value funds?
Value-oriented mutual funds are long term equity funds. Hence, you should invest for at least five years to see good returns.
Where do value mutual funds invest?
Value mutual funds invest at least 65% of the corpus following value investment strategy when they select where to invest the money. Since value investing is not defined as per regulation, fund managers use individual methods and frameworks in selecting value stocks. However, most would follow the basic tenet of value investing of choosing undervalued stocks compared to their intrinsic value.
What kind of returns should I expect from value-oriented mutual funds?
Value-oriented mutual funds had generated an average return of 15.64% in the last five years, whereas three and ten years returns were 22.61% and 14.19%.
Are value mutual funds high risk?
Since value mutual funds invest in equities, these are volatile in the short term. However, in the long-run, volatility reduces significantly, mainly due to the strategic selection of stocks.
Should I invest in value mutual funds?
You can invest in value mutual funds if you have a long investment horizon and can be patient with your investment. Value investing proposes investing in stocks that are currently out of favour but have strong fundamentals. Another benefit is since these stocks are already discounted, the risk of them going down further in a bearish market is little. However, value investing is an alternate strategy. Hence, you should have funds in different schemes to ensure diversification.