Different fund managers adopt different investing styles. By using these investment styles, they are able to invest the scheme’s corpus efficiently. A commonly used investment style is a growth strategy, a value strategy, or a contrarian investment strategy. According to these styles, the funds are called Growth Funds, Value Funds, and Contra Funds. In this article, we’ll look at Value Mutual Funds, and we’ll talk about how to invest in them.
What are Value Funds?
A Value Fund is a Mutual Fund that invests in undervalued stocks and waits for them to reach their fair price. It is a long-term investment strategy, and you cannot expect the stock price to reach its fair value in a day.
Intuitive value refers to the fair price of a stock. By analyzing the company fundamentally, this value can be determined. Because of different inefficiencies in the market, a stock’s market price may not always match its intrinsic value. Once these inefficiencies are sorted by the market itself, the market price and intrinsic value become equal.
These inefficiencies are discovered by fund managers and they invest in undervalued stocks accordingly. When the inefficiencies are corrected, the fund’s price will rise along with the stock prices.
How Do Value Funds Work?
A value fund invests in companies whose intrinsic value is undervalued in the market. Essentially, this means that the market price is less than the intrinsic value of these shares. Based on key factors such as the company’s current assets, earning potential, and cash flow, unrealised value is calculated.
Investors who buy undervalued stocks at a discount rely on the belief that their prices will rise over time. The portfolio of this type of mutual fund consists of stocks selected according to certain criteria, such as low P/E ratios, low P/B ratios, and/or high dividend yields. It is also important for value investors to check other metrics like quality of management, performance in the current sector, and peer comparisons to gain a better understanding of undervaluation.
The responsibility of a value fund manager is to pick the right stocks and create a well-diversified portfolio. The main goal of their investment strategy is to hold value stocks for an extended period. It allows the market time to recognize the true value of these stocks, which can result in potentially high gains in the future.
How to Invest in Value Funds?
To invest in value funds, you can do the following:
- Select a mutual fund app or the website of the fund house.
- Register on the portal or application.
- Open your account after completing your KYC.
- Make a deposit and choose Value mutual funds to invest in.
Benefits of Value Funds
There are several benefits associated with value investing. Some of the benefits of value funds are:
- Diversified portfolio: Despite the asset allocation being mostly growth-oriented equity stocks, investors get access to a diverse portfolio. A portfolio of undervalued stocks across different sectors and market capitalizations reduces overall risk considerably.
It is important to remember that no two sectors or stocks will have the same level of risk. Therefore, stocks from different sectors tend to perform differently in different economic conditions. To some extent, a well-diversified portfolio can mitigate the overall risk of equity investments.
- Prone to Short-Term Volatility: Like all equity-oriented schemes, value funds are vulnerable to short-term market fluctuations. However, some investors argue that Value Funds are less susceptible to market volatility because they invest in undervalued out-of-favor stocks. However, investing in a value equity fund will still be associated with significant short-term volatility.
- Potential for Higher Returns: Value mutual funds may deliver high returns over a long investment horizon. It is primarily due to the fact that the true market value of these stocks is only realized over a long period of time. When investing for long-term goals like retirement planning, buying a new house, or saving for children’s education, value funds are the suitable choice.
- Potential for Higher Risk-Adjusted Returns: Past performance shows that value funds may provide reasonable risk-adjusted returns. Stocks in these mutual funds are undervalued and have already declined in price. Compared to the broader market, these schemes have a significantly lower beta (market risk). Thus, value fund schemes can generate higher long-term risk-adjusted returns.
Conclusion
Value Funds offer investors a strategic approach to capitalize on undervalued stocks with the potential for long-term growth. By focusing on companies whose intrinsic value exceeds their market price, value investors aim to benefit from market inefficiencies and the eventual correction of stock prices. Despite being subject to short-term market fluctuations, value funds provide diversified portfolios that can help mitigate overall risk. By researching and selecting value funds aligned with one’s investment goals, investors can enhance their portfolios by investing in undervalued stocks.
Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
Past performance may or may not be sustained in future.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.