Value Funds

The Securities and Exchange Board of India (SEBI) defines value mutual funds as funds that follow a Value investment strategy, with at least 65% in equity and equity-related instruments.

At its core, a value fund is a type of mutual fund that primarily invests in stocks believed to be undervalued by the market.

These funds try and find investment opportunities that other funds usually dismiss or overlook.

Their main aim is to identify stocks trading below their intrinsic value and potentially benefit from their future growth.

Value investing is an investment strategy pioneered by Benjamin Graham, known as the father of value investing. He believed that market prices of stocks often fluctuated irrationally and did not necessarily reflect their underlying intrinsic value. 

The concept of value investing is based on the belief that the market occasionally misprices stocks, not recognising their true potential. This allows intelligent investors to buy undervalued stocks and profit from their future appreciation.

The basis of value investing lies in calculating a stock's intrinsic value, which is its estimated true worth based on its earnings, assets, cash flow, and growth potential. 

Value investors analyse financial statements, company performance, industry trends, and other relevant factors to estimate the intrinsic value of a stock.

Did you know: As of 2023, India has more than 10 value funds that made investors double-digit returns

1. Potential for Higher Returns: Value funds can deliver good returns when the price of undervalued stocks in their portfolio increases as the market recognises their true worth.
2. Safety Margin: By investing in undervalued stocks, value funds provide a safety margin, reducing the downside risk if the stock price temporarily falls. When the stocks are undervalued, the chances of it going down further are not that high.
3. Capitalising on Missed Opportunities: Value funds excel at identifying overlooked or undervalued stocks. If the fund manager chooses the right stocks and they perform well, the potential for growth is very high

1. Long Investment Horizon: Value investing requires more patience in comparison to growth investing. It may take time for undervalued stocks to realise their true worth and deliver favourable returns, and that might not be ideal for short-term investors who are looking to grow their money quickly.
2. Value Traps: Not every bet the fund manager makes may work. There is a risk of falling into value traps, where stocks continue to underperform despite appearing undervalued, leading to potential losses for investors.
3. Underperformance during Low-Interest Rates: Value funds may face challenges during periods of low-interest rates. During such phases, growth-oriented stocks tend to outperform. This can potentially impact the short-term performance of value mutual funds.

Value investing is not the only approach fund managers take to select stocks. Growth investing is another method that invests in the growth potential of stocks.

Determining your investment style is crucial to aligning your investment objectives with the right strategy. 

Are you a value investor or a growth investor? Compare the parameters in the table below to understand your investing style better.

Value investing takes a unique approach to investing that can benefit investors willing to capitalise on stocks that are mispriced in the market.

But an important point to remember is that while historical data shows that many value funds have delivered double-digit returns over a 10-year horizon, past performance does not guarantee future results.

Investing in value mutual funds involves risks, and it is essential to conduct thorough research, analyse the fund's and fund manager’s track record, and assess your risk tolerance before making any investment decisions.

By understanding the principles and drawbacks of value mutual funds, you can make informed investment choices that align with your financial goals. 

Note- As an investor, it is crucial to align your investment philosophy and risk appetite with the objectives of the fund. Furthermore, it is advisable to consult with a financial advisor who can provide personalised guidance tailored to your specific financial goals and circumstances.