Value Mutual Funds

An open-ended equity fund that invests in undervalued stocks is a value mutual fund. Value funds are different from growth funds. Here, you concentrate on cheap stocks chosen through fundamental examination. Value funds are more appropriate for long-term investors because they have the potential to appreciate in value over the years.

Value funds typically seek to capitalise on opportunities where the market has undervalued a company. This strategy involves identifying stocks that are trading below their intrinsic value, often due to temporary market trends, investor sentiment, or other external factors.

As a result, value funds may offer the potential for significant capital appreciation over time as the market recognises the true value of these stocks. However, it's essential to note that investing in value funds also involves certain risks, such as value traps, where a stock appears undervalued but fails to realize its potential for an extended period. Therefore, investors should carefully assess their risk tolerance and investment objectives before considering value funds as part of their portfolio.

What Are Value Funds?

Value funds are a type of mutual fund that invests in stocks considered undervalued. These funds focus on finding stocks trading at a lower price. This approach varies from growth funds, which typically invest in stocks with strong potential for future growth. Value funds are more suitable for long-term investors who want to see the value of their investments grow over time.

Best Value Mutual Funds

List of the top-performing Value mutual funds sorted by returns with their AUM and Expense Ratio.

How Does a Value Mutual Fund Work?

Value fund managers search for stocks that are considered inexpensive for various reasons, including market inefficiencies. These stocks might not be performing well in the market currently, but fund managers believe they have the potential for growth. As the market starts to recognize the true value of these stocks, their prices can rise.

Additionally, dividend yields on value ETFs (exchange-traded funds) are often higher. This means that investors in value funds may receive a relatively higher portion of the company's profits in the form of dividends. Fund managers carefully identify potential stocks with limited negative risks, meaning they aim to select stocks that have the potential for growth while also considering the associated risks. This approach seeks to provide a balance between potential returns and the preservation of invested capital.

Advantages of Value Mutual Funds

Diversification: Value Funds provide exposure to a diversified portfolio, mainly investing in growth-oriented Mutual Fund schemes. This diversification helps spread the investment across different stocks, sectors, and asset classes, which can reduce the overall risk in the portfolio. By investing in a variety of undervalued stocks, value funds aim to capture potential returns from multiple sources while minimizing the impact of adverse movements in any single investment.

Reduced volatility: Since these funds focus on undervalued stocks, they are often less vulnerable to market volatility. By focusing on stocks that are already trading at a lower price relative to their intrinsic value, value funds may exhibit less price fluctuation compared to growth-oriented funds. This reduced volatility can provide investors with a sense of stability and confidence, especially during turbulent market conditions.

Potential for high returns: Value Funds offer the potential for high returns in the long run by investing in stocks below their intrinsic values. As the undervalued stocks in the fund appreciate and move closer to their intrinsic values, investors may benefit from significant capital appreciation over time. This potential for high returns makes value funds appealing to long-term investors seeking to grow their investment portfolios, instilling a sense of optimism and hope.

Margin of safety: Value investing offers a margin of safety as investors purchase stocks at prices lower than their actual values, which can lead to substantial profit margins. This margin of safety provides a cushion against potential investment losses and enhances the potential for attractive risk-adjusted returns. By acquiring stocks at a discount to their intrinsic values, investors may have a greater chance of realizing capital gains when the market corrects and adjusts the prices to reflect the true worth of the stocks, instilling a sense of security and confidence.

Disadvantages of Value Mutual Funds

Underperformance during growth phases: Value mutual funds may underperform during periods when growth stocks and sectors outperform the market. This means that in a market environment where investors favour fast-growing companies, value funds may lag behind growth-oriented funds. As a result, investors in value funds may experience relative underperformance compared to the broader market during certain market cycles.

Limited diversification in certain sectors: Value funds may have a tendency to be concentrated in specific sectors or industries, which can lead to limited diversification. This concentration can increase the fund's sensitivity to sector-specific risks and may lead to heightened volatility if those sectors face challenges or downturns.

Potential for value traps: Value investing carries the risk of falling into value traps, where stocks appear undervalued but fail to realize their potential. This can lead to prolonged periods of underperformance and potential losses for investors. Value traps are essentially stocks that seem undervalued based on certain metrics, but their prices remain low or even decrease over time. Identifying which stocks are genuinely undervalued and have the potential to appreciate in value can be challenging, and incorrect assessments can lead to subpar returns.

Cyclical nature: Economic cycles and market trends often affect Value funds, as they rely on market inefficiencies in pricing stocks. During certain periods, such as economic downturns or market corrections, value stocks may come under pressure, impacting the performance of value funds. This cyclical nature can result in periods of underperformance relative to other investment strategies. Understanding this cyclical nature can help investors feel prepared and knowledgeable about potential market fluctuations.

Who Should Invest in Value Funds?

Value investing strategy is a disciplined investment strategy that focuses on identifying undervalued stocks with the potential for long-term growth, a principle central to value mutual funds. These funds, managed by skilled fund managers, aim to buy stocks below their intrinsic value, providing an opportunity for higher returns when the market corrects its valuation. Unlike growth funds, which focus on companies with high growth potential, value mutual funds prioritize stable, undervalued stocks that have been overlooked by the market.

Mutual funds, including value mutual funds, rely heavily on the expertise of fund managers who use a value investment strategy to navigate the complexities of the market. These fund managers invest in equity funds that include a mix of undervalued stocks and other assets to mitigate market risk. Successful investors often choose value-oriented mutual funds as they offer a balanced approach to investing, combining the potential for appreciation with portfolio diversification.

For value fund investors, the decision to invest in value mutual funds is influenced by their confidence in the fund manager’s ability to identify stocks with significant upside potential. Investing in value funds can be an attractive option for those looking to balance their portfolios with a mix of growth stocks and value stocks. Fund managers invest with the aim of achieving steady returns by focusing on market inefficiencies and the intrinsic value of companies.

Value-oriented mutual funds are designed for investors who prefer a conservative approach, prioritizing capital preservation and minimizing market risk. These funds invest in a diversified portfolio of undervalued stocks, providing an opportunity for portfolio diversification while catering to aggressive investors seeking to capitalize on market corrections. Asset management companies that offer these funds typically have a range of fund schemes, allowing investors to choose the right mutual fund based on their risk tolerance and investment goals.

For fund investors, whether they are looking to invest in value or growth investing, mutual funds offer a structured way to participate in the equity markets. Fund managers, through their investment strategy, ensure that the funds invest in a well-balanced portfolio, aiming to achieve long-term growth while mitigating risks. By investing in value funds, investors can benefit from the expertise of experienced fund managers and the potential for significant returns as the market recognizes the true value of undervalued stocks.

Factors to Consider When Investing in Value Funds

By carefully evaluating these factors, investors can make well-informed decisions about including value mutual funds in their investment portfolios.

Investment Goals: It is crucial to clarify investment objectives. Determine whether the primary goal is capital appreciation, regular income, or a combination of both. Understanding investment goals will influence the type of value fund that aligns with the investor's objectives and risk tolerance.

Risk Tolerance: Assess the investor's risk tolerance. While value funds are generally considered to be less risky than growth funds, they can still involve market risk. It is important to ensure that the risk tolerance aligns with the potential volatility and time horizon associated with value investments.

Time Horizon: Consider the investment horizon. Value investing is typically a long-term strategy, so it is essential to determine how long an investor plans to hold their investments in the fund. Understanding the time horizon will help in selecting value funds that are compatible with the investor's long-term financial objectives.

Fund Manager and Track Record: Research the fund manager's experience, investment approach, and track record. A skilled and experienced manager can be crucial in selecting undervalued stocks and managing the portfolio effectively. Understanding the fund manager's strategy and track record can provide valuable insights into the potential performance of the value mutual fund.

Expense Ratios: Compare the expense ratios of different value funds. Lower expenses can result in higher net returns for investors over time. It is important to consider the impact of fees on the overall performance of the fund and select value funds with competitive expense ratios to maximize potential returns.

Taxation on Value Mutual Funds

• Gains from holding assets for over a year are subject to a 12.5% tax rate without indexation, provided they are under ₹1.25 Lakh.
• Investors pay a 20% tax on short-term capital gains (held for less than a year).
• Investors are subject to dividend taxation according to their applicable income tax slab.

How to Invest in Value Mutual Funds?

To begin investing in Value Fund, follow these steps:

• Open the INDmoney app and log in with your credentials.
• Navigate to the "Mutual Funds" section within the app.
• Use the filter options to select "Value Funds" to view the available choices.
• Decide between a lump sum investment or a Systematic Investment Plan (SIP) for regular investments.
• Enter the desired investment amount and confirm the transaction.