What are Value Mutual Funds and How to Invest in 2024?

Are you an investor with a long-term goal and willing to take risks? Here is a guide to value funds for you.
What are Value Mutual Funds and How to Invest in 2024?
4 mins read
29 Feb 2024

What is a Value Fund?

Value funds are a type of mutual fund that invests in stocks that are undervalued by the market. These stocks have low price-to-earnings (P/E) or price-to-book (P/B) ratios, and are expected to appreciate in the future. Value funds aim to generate long-term capital appreciation by buying these stocks at a bargain price and selling them when their true value is realised.

How a value fund works

A value fund works by following a value investing strategy, which is based on the principle of buying low and selling high. A value fund manager analyses the financial statements, business models, competitive advantages, and growth prospects of various companies, and selects the ones that are trading below their intrinsic value.

The fund manager also looks for catalysts that can trigger a positive change in the market perception of these companies, such as a turnaround in performance, a change in management or ownership, or a new product launch. A value fund typically holds a diversified portfolio of stocks across different sectors and market capitalisations, and has a low portfolio turnover.

Who should invest in value mutual funds?

Value mutual funds are suitable for investors who have a long-term investment horizon, a high risk appetite, and a contrarian mindset. Value investing requires patience and discipline, as it may take time for the market to recognise the true worth of the undervalued stocks.

Benefits of value funds

  • Higher returns: Value funds can offer higher returns than growth funds in the long run, as they buy stocks at a discount and sell them at a premium. Value funds can also benefit from the re-rating of the undervalued stocks, as the market recognises their true potential and adjusts their prices accordingly.
  • Lower volatility: Value funds tend to have lower volatility than growth funds, as they invest in stable and mature companies that have consistent earnings and cash flows. Value funds are also less affected by market fluctuations, as they focus on the intrinsic value of the stocks rather than their market price.
  • Lower downside risk: Value funds have lower downside risk than growth funds, as they invest in stocks that have a margin of safety. This means that the stocks have a lower probability of falling below their purchase price, as they are already undervalued by the market. Value funds can also provide a cushion during market downturns, as they have a lower correlation with the broader market indices.

How to invest in value funds?

You can invest in value funds through various modes, such as lump sum, systematic investment plan (SIP), or systematic transfer plan (STP).

Factors to consider before investing in value mutual funds

  • Past performance: Past performance is not a guarantee of future results, but it can indicate the consistency and reliability of the fund manager and the fund strategy. You should look at the long-term performance of the value funds, and compare them with their benchmark indices and peer funds. You should also check the risk-adjusted returns of the value funds, which measure the returns per unit of risk taken by the fund.
  • Investment horizon: Value investing requires a long-term investment horizon, as it may take time for the undervalued stocks to appreciate in value. You should invest in value funds only if you have a time horizon of at least five years.
  • Diversification: You should diversify your portfolio by investing in different types of value funds, such as large-cap, mid-cap, small-cap, multi-cap, or thematic value funds. You should also invest in other types of funds, such as growth funds, dividend funds, balanced funds, or debt funds, to balance your risk and return profile.

Taxability of value funds

Value funds are taxed as equity funds, as they invest at least 65% of their assets in equity and equity-related instruments. The tax implications of value funds are as follows:

  • Short-term capital gains (STCG): If you sell the units of the value fund within one year of purchase, the gains are taxed as short-term capital gains at a flat rate of 15%, plus surcharge and cess as applicable.
  • Long-term capital gains (LTCG): If you sell the units of the value fund after one year of purchase, the gains are taxed as long-term capital gains at a rate of 10%, plus surcharge and cess as applicable. However, there is an exemption of Rs. 1 lakh per financial year for the long-term capital gains from equity funds. This means that the gains above Rs. 1 lakh are taxable, and the gains below Rs. 1 lakh are tax-free.

Risk involved with value funds

  • Market risk: Value funds invest in stocks that are sensitive to the economic and business cycles, and can be affected by factors such as interest rates, inflation, exchange rates, political events, and global trends. Value funds can also face the risk of value traps, which are stocks that appear to be undervalued, but are actually declining due to fundamental reasons, such as poor management, low profitability, high debt, or weak competitive advantage.
  • Selection risk: Value funds rely on the fund manager’s judgment and analysis of the stocks, which may not always be accurate or timely. The fund manager may also miss out on the growth potential of the stocks that are undervalued, but have strong fundamentals and prospects.

How to invest in Value Oriented Funds?

Value-oriented funds seek out stocks that are currently trading at a discount due to various reasons but have long-term potential. Here is how you can invest in value-oriented funds:

1. Understand value investing:

  • Value investing focuses on buying undervalued assets (such as stocks) with the expectation that their true worth will be recognised over time. It is about identifying opportunities where the market has temporarily mispriced an asset.

2. Choose a value-oriented fund:

  • Look for mutual funds specifically categorized as value-oriented funds. These funds actively seek out undervalued stocks.
  • Consider factors such as historical performance, expense ratio, and the fund manager’s strategy.

3. Evaluate the fund’s track record:

  • Check the fund’s historical returns and consistency.
  • Understand the fund’s investment approach and whether it aligns with your investment goals.

4. Invest via an online platform:

  • Register online on a mutual fund platform
  • Head to the Mutual Funds section and choose the value-oriented fund you want to invest in
  • Click on Invest and select the amount and mode of investment (SIP or lump sum)
  • Provide your KYC details (PAN number, bank details) to complete your investment

Remember that value investing requires patience. While undervalued stocks may take time to recover, they have the potential to become valuable assets in the long run.

Conclusion

Value funds may offer higher returns, lower volatility, and lower downside risk than growth funds in the long run, but they also involve market risk, liquidity risk, and selection risk. You should consider your investment objectives, risk profile, and time horizon before investing in value funds, and diversify your portfolio by investing in different types of mutual funds.

Frequently asked questions

What is the ideal investment horizon for value funds?

The ideal investment horizon for value funds is 7+ years.

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

There is no holding period or lock-in period for value funds, except for tax-saving value funds.

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

The benefits of value investing are portfolio diversification, low volatility, and high returns potential.

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

Value funds do not have any restrictions in terms of asset allocation, as they can invest across market capitalisations and sectors.

What is the risk rating for value funds?

The risk rating for value funds is very high, as they invest in stocks that are out of favour or undervalued.

What is the minimum amount required to invest in a value fund?

The minimum amount required to invest in a value fund varies from fund to fund, but it can be as low as Rs. 500 for some funds.

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