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Understanding Value Mutual Funds

Understanding Value Mutual Funds

Have you ever seen mutual fund schemes that have the suffix ‘value’ added to their name? Well, if you come across such a scheme, you should know that it is a value mutual fund.

The term ‘value’ here simply indicates the underlying investment strategy of the mutual fund. Fund managers adopt different investment styles, which allow them to invest the corpus of the scheme efficiently. The three most common styles are growth, value, and contrarian. So, the funds which follow the value investment style are called value mutual funds or simply value funds.

Let us now explore them in detail and have a look at some of their features and benefits.

What is a value fund?

A value fund is a type of mutual fund where the fund’s manager adopts a value investing strategy.

What this means is that they look for stocks which are undervalued but have the potential to provide long-term capital appreciation. Fund managers use various fundamental analysis techniques to identify companies that are trading at a discount to their intrinsic value or have a lower price-to-earnings ratio (or price-to-book ratio) compared to their peers. These stocks may be from several sectors and market capitalizations but tend to have stable cash flows.

Benefits of value funds

#1 Long-term capital appreciation

If you invest in undervalued stocks that have the potential for steady long-term growth, you can rest assured of much higher returns over time.

#2 Diversification

Value mutual funds can invest their corpus in companies across market caps and sectors. Thus, they offer a well-diversified portfolio with reduced risk.

#3 Professional management

If you want to invest in value stocks but don’t know how to identify them, value mutual fund schemes are an easy way to get started. This is because they are under the management of professional fund managers who use their experience and expertise to identify undervalued stocks.

#4 Lower expense ratios

Value mutual funds require less frequent buying and selling of stocks. They tend to have a less active management style and lower expense ratios.

#5 Protection against market volatility

Value mutual funds focus on value companies with stable cash flows and strong fundamentals. Therefore, they offer smoother sailing during periods of market volatility as compared to growth funds.

Who should invest in value mutual funds?

You should invest in value mutual funds if:

1. You want to invest in value stocks but don’t have the time or expertise to find suitable stocks.

2. You have a long-term investment horizon.

3. You have exposure to stocks of growth companies and want to diversify your portfolio.

Things to consider before investing

#1 The past performance of the mutual fund is crucial

While it is important to assess the past performance of any mutual fund, it is especially important in the case of value mutual funds. This is because you need to understand how the fund has fared through various market cycles.

#2 Value funds are ideal for long-term investors

Most equity funds are suitable for long-term investments. But, staying invested for a long time is crucial in the case of value investing because the stocks selected are expected to reach their potential value over the long term. So, it is important to stay invested for a period of at least five years.

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