What are value mutual funds?

Value funds are open-ended equity mutual funds that follow a strategy called value investing. They concentrate on stocks believed to be undervalued compared to their actual worth. Long-term growth seekers often favor this approach. Let’s take a closer look at value funds: what they are, their distinctive traits, and the benefits they bring to investors.

• Table of contents

• Understanding value funds
• Features of value mutual funds
• How does a value fund work?
• Benefits of value funds
• Factors to consider before investing in value mutual funds
• Risk involved with value funds
• Who should invest in value mutual funds?
• Why should you Invest in a value mutual fund?

Understanding value funds

Value mutual funds are a category of mutual funds that follow a ‘value investing’ strategy. This strategy is rooted in the principles of identifying undervalued stocks in the market. Fund managers employing a value approach focus on securities they believe are trading below their intrinsic value. In other words, they seek stocks that the market has underestimated or overlooked, anticipating that these stocks will experience a price correction over time.

Benefits of value fund are as follows:

• Potential for returns: The primary appeal of value mutual funds lies in their potential for higher returns. By investing in stocks believed to be undervalued, these funds aim to capitalise on the future appreciation of these securities as the market corrects its pricing.
• Risk mitigation: Value mutual funds often invest in established companies with sound fundamentals. This emphasis on financial stability and solid business models can contribute to risk mitigation.
• Long-term focus: Value mutual funds encourage investors to adopt a patient approach, aligning with the idea that undervalued stocks may take time to realise their true potential.
• Diversification: Mutual funds, by nature, offer diversification benefits. Value mutual funds, through their portfolio of undervalued stocks across different sectors, provide investors with a well-rounded exposure to various segments of the market.
• Professional management: Fund managers with expertise in value investing oversee value mutual funds. Thus, investors benefit from the experience and research capabilities of these professionals.

Also Read: Contra funds vs value funds: Key differences for investors

Features of a value mutual fund

Value mutual funds invest in stocks that are undervalued by the market. These funds focus on companies with strong fundamentals, such as solid earnings, low price-to-earnings ratios, and high dividend yields, but whose stock prices are relatively low compared to their intrinsic value.

Value funds seek to earn returns if the market eventually recognises the companies’ intrinsic value, resulting in a price correction:

• They invest in companies with strong fundamentals but low market valuations.
• They often target mature companies or those in out-of-favour sectors.
• They generally have a long-term investment horizon.
• They aim to capitalize on market inefficiencies.

How does a value fund work?

A value fund employs a strategy of identifying stocks that are trading below their intrinsic value. Fund managers conduct research and analysis to find companies with strong financial health but undervalued stock prices.

• Managers analyze financial statements and key ratios to identify undervalued stocks.
• They look for companies with strong earnings, low debt, and high cash flow.
• They invest with a long-term outlook, anticipating that the market will correct the undervaluation.
• The fund’s net asset value fluctuates with underlying stock prices.

The potential for returns arises if undervalued stocks appreciate in price as market sentiment evolves.

Benefits of value funds

Value funds offer several potential benefits, especially for investors with a long-term perspective and a high risk appetite.

• Potential for long-term capital appreciation.
• Possibility of lower volatility compared to growth-oriented strategies during market downturns.
• Opportunity to invest in fundamentally strong companies.
• Potential gains if the market corrects the perceived undervaluation.

However, value investing requires patience, as the market may take time to potentially recognise the intrinsic value of these companies. Moreover, like all equity investments, value funds require a high risk appetite.

Factors to consider before investing in value mutual funds

Investors should evaluate key factors before investing in value mutual funds to ensure alignment with their financial goals and risk tolerance.

Investment horizon: Value investing requires a long-term perspective.
Fund manager’s track record: Assess experience and past performance*.
*Past performance may or may not be sustained in future.
Expense ratio: A higher expense ratio can impact overall returns.
Portfolio diversification: Ensure that the fund is diversified across sectors and companies.
Financial goals: Determine how the fund fits into your overall financial plan.
Risk appetite: Since value funds are equity funds, they require a high risk appetite.

Risk involved with value funds

Value funds, like all equity funds, are subject to market fluctuations and various risks.

• Market risk: A broad market decline can impact fund performance.
• Company-specific risk: The market may not recognize the perceived undervaluation, or the company’s fundamentals may weaken.
• Concentration risk: If the fund is heavily weighted in a few sectors or stocks, it may be more vulnerable to volatility.
• Opportunity cost: Other investments may yield better potential returns.
• Liquidity risk: This risk is higher in smaller-cap funds with lower trading volumes.

Also Read: What are value funds? Strategy, benefits and factors to consider before investing

Who should invest in value mutual funds?

Investing in value mutual funds can be advantageous for those seeking relatively stable growth and willing to hold investments for the long term. They are suitable for individuals who prioritize value over short-term gains and prefer a disciplined investment approach. Let’s have a look at who can consider investing in value mutual fund.

• Long-term investors: Investors with a long-term horizon and a willingness to hold onto their investments through market fluctuations can benefit from the patient and enduring nature of value investing.
• Risk-averse investors: Value mutual funds are generally considered less volatile than some growth-oriented counterparts. Risk-averse investors may find value funds to be a suitable fit for their investment goals.
• Those seeking a balanced portfolio: Investors looking to diversify their portfolio by adding a value-oriented strategy can benefit from including value mutual funds.

Why should you invest in a value mutual fund?

Value mutual funds offer the potential for long-term capital appreciation and exposure to companies with strong fundamentals. However, patience is essential in value investing, as market corrections can take time. All equity investments require a high risk appetite. Here are some reasons to invest:

• Potential for long-term growth through undervalued stocks.
• Opportunity to capitalize on market inefficiencies.
• Possibility of relatively lower volatility during downturns compared to growth funds.
• Diversification benefits within an equity portfolio.

Conclusion

Value mutual funds present a good option for investors seeking a strategic and disciplined approach to wealth creation. The emphasis on identifying undervalued stocks, coupled with the benefits of professional management and diversification, makes these funds a valuable component of a well-rounded investment portfolio.

FAQs

What is the value funds meaning?

Value funds are equity mutual funds that invest in stocks considered undervalued by the market. These funds seek to benefit from the potential appreciation of such stocks if the market recognises their intrinsic value over time.

Who can invest in value funds?

Value funds may be suitable for investors with a high risk tolerance and a long-term investment approach. They appeal to those who rely on fundamental analysis and are prepared to wait for the market to potentially recognize the value of these stocks.

When can I start to invest in value funds?

Investing in value funds can be done at any time. However, they may be considered particularly during market corrections or when valuations are lower, as this could enhance potential returns. Since timing the market is challenging, maintaining a long-term perspective is important.

What is a suitable investment horizon for value funds?

A long-term investment horizon, generally five years or more, is recommended for value funds. This allows enough time for undervalued stocks to potentially appreciate, giving the fund an opportunity to earn potential gains. Value investing requires patience and a commitment to long-term growth.

Is there any holding period or lock-in period for value funds?

Value mutual funds in India typically do not have a mandatory lock-in period, unlike Equity Linked Savings Schemes (ELSS). However, to potentially achieve better returns, investors are encouraged to hold them for the long term, usually five years or more, to allow the strategy to unfold and yield potential returns.

What are the benefits that investors get by using the value investing approach?

A value investing approach may enable investors to purchase stocks at prices lower than their estimated intrinsic value, creating an opportunity for long-term capital appreciation. This strategy focuses on companies with strong fundamentals, which can provide a degree of downside protection compared to growth-oriented stocks.

Do value funds have any restrictions in terms of asset allocation?

According to SEBI regulations, value funds must allocate at least 65% of their assets to equity and equity-related instruments. Beyond this, fund managers have flexibility in asset allocation, depending on their investment strategy. The distribution across sectors or market capitalization categories varies between funds.

What is the risk rating for value funds?

Value funds are classified as high-risk investments since they primarily invest in equities, which are subject to market volatility. While the strategy seeks to identify undervalued stocks, it does not eliminate risks associated with overall market fluctuations.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.