Value Funds

Seasoned shoppers always wait for discount seasons to buy big-ticket items like electronics or luxury goods, etc. In doing so, they enjoy the same performance or quality from the purchase, but at a comparatively lower price. Just like people prefer to wait for a good quality phone to become cheaper, value investors are often on the lookout for prices of stocks to come down before they invest in them. This, in essence, is value investing. 

What are value funds?

Value funds are a type of mutual funds where the fund manager adopts an investment strategy based on value investing. This involves picking stocks that are experiencing a dip in prices due to temporary movements but have strong fundamentals that have the potential of fetching good returns in the future. In some cases, the stocks may be experiencing a temporary dip in demand. Most value funds invest a minimum of 65% of their pool into equity and related instruments. 

Benefits of investing in value funds

Some of the noteworthy benefits of investing in value funds are:

• Value funds offer portfolio diversification benefits to investors, since asset allocation is mostly focused on high growth stocks.
• Investing in these funds carries lower risk since the portfolio usually has higher safety margins. The undervalued stocks also pose a lower downside risk since they are believed to be trading at a significant discount as compared to their intrinsic value.
• Another benefit that investors can fetch from these is exposure to various sectors.
• Value funds exploit market inefficiencies. They buy stocks that are undervalued by the broader market but have a good track record and above-par management. This increases the probability of such stocks being recognised by the broader market in the long run.
• As the broader market begins to identify the stock’s actual worth, more investors begin investing in them and this results in a steeper price rise.

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What are the risks of investing in value funds?

Although value funds post lower downside risks, these may pose a value trap for investors. While fund managers may expect the stock prices to move upwards during certain timelines, this may either be delayed or never happen. This could result in the fund selling off the stocks at considerably lower rates. These funds may also consistently underperform for an extended period, especially when markets are on an upward trend.

Tax applicable on value funds

Value funds are primarily equity-focused. Therefore, the returns from these are taxable in the same way as equity mutual fund returns. Here are some points to note:

• Dividends from value funds are added to the total income of the individual and taxable as per the applicable income tax slab.
• Short term capital gains, i.e, gains from the sale of units within one year from an investment, are taxable at 15% irrespective of the income tax slab of the individual.
• Long term capital gains, i.e. gains realised from the redemption of units after one year of investment are tax-free up to a maximum of Rs. 1 lakh. Any gains above this amount are taxable at 10% and no indexation benefit can be availed.

Who should invest in value funds?

Value funds are ideal for investors who want to make the most of price discovery of undervalued stocks that have high growth potential and strong fundamentals. Since price discovery can be a long process, investors who have an investment horizon of at least 5-7 years must consider investing in value funds. This way, they can fetch maximum benefits through a complete investment cycle. Investors can use value funds to limit the downside risk of their investment portfolio during overvalued market conditions. 

Recommended read – How to avoid loss in stock market?

Top-performing value fund recommendations

Some of the top-performing value fund recommendations for 2021 are:

1. ICICI Prudential Value Discovery Fund

About the Fund

The fund aims to generate returns through dividend income and capital appreciation by focusing on establishing and maintaining a well-diversified portfolio of value stocks. 

Inception Date	January 01, 2013
Benchmark Name	Nifty 50 TRI
Fund Manager	Sankaran NarenPriyanka Kandelwal
Expense Ratio	1.24%

Historical Returns of the Fund (annualised)

1-month	3-month	6-month	1-year	3-year	5-year
2.51%	7.70%	18.72%	58.10%	14.92%	13.45%

2. UTI Value Opportunities Fund

About the Fund

The scheme aims to generate long-term capital appreciation through investment predominantly in equity and equity-related securities. It invests in value stocks belonging to companies with different market capitalizations.

Inception Date	January 01, 2013
Benchmark Name	Nifty 500 Total Return Index
Fund Manager	Vetri SubramaniamAmit Kumar Premchandani
Expense Ratio	1.29%

Historical Returns of the Fund (annualised)

1-month	3-month	6-month	1-year	3-year	5-year
3.87%	10.90%	18.77%	60.62%	16.80%	14.97%

3. L&T India Value fund

About the Fund

The fund aims to generate long-term capital appreciation through a portfolio comprising predominantly of equity and equity-related securities. The fund mainly invests in the Indian markets with a special focus on undervalued stocks. 

Inception Date	January 01, 2013
Benchmark Name	S&P BSE 200 Total Return Index
Fund Manager	Vihang NaikVenugopal Manghat
Expense Ratio	0.87%

Historical Returns of the Fund (annualised)

1-month	3-month	6-month	1-year	3-year	5-year
4.17%	12.30%	22.47%	65.30%	15.35%	15.42%

4. Nippon India Value Fund

About the Fund

The scheme aims to generate capital appreciation, along with consistent returns through an active investment strategy focused on equity/ equity-related securities. The fund predominantly invests in value stocks. 

Inception Date	January 01, 2013
Benchmark Name	NIFTY 500 Total Return Index
Fund Manager	Meenakshi Dawar
Expense Ratio	1.48%

Historical Returns of the Fund (annualised)

1-month	3-month	6-month	1-year	3-year	5-year
3.68%	10.74%	21.86%	67.06%	17.43%	15.60%

Conclusion

While investing in value funds, investors must ensure that they have a well-defined investment portfolio with measurable risks. It is equally important to consider the risk and return aspects of value funds, combined with the fund manager’s past success rate before investing in these. Always measure the fund objective against the personal financial objective to ensure maximum benefits in the long run.

FAQs

1.What is a blue-chip fund?

Blue-chip funds are mutual funds that invest in equity of companies that have large market capitalisation. Market capitalisation is the total number of outstanding shares of a company multiplied by the current share price.

2. Are mutual fund investments safe?

Every mutual fund comes with different risk levels and this is communicated by the AMC through the offer document or on its website. Investors must weigh the fund objective and risk levels against personal preferences before making an investment.

3. How to invest in value funds?

To invest in some of the best value funds, you can download the Fisdom app on your smartphone. This app allows access to a wide range of mutual funds catering to different risk/return preferences of investors.

4. Are value funds safer than growth funds?

Value funds invest in stocks that offer value in the long run, whereas growth funds are focused on stocks that have faster growth potential. Value funds can be considered safer because the stocks are backed by strong company fundamentals and capable management.