Value funds are a kind of equity mutual fund where the dominant stocks being traded in are the ones considered to be undervalued but have a higher dividend yield. The stocks held by value funds belong to companies that may be currently out of favour in the market due to various factors, but hold the potential to grow. Because of this wait-and-watch component, value funds need to be held on to for a longer period of time to reap profits from them. Value funds are not focused on growth; instead they depend on “perceived safety”. While some of the companies invested in would be undervalued because of poor earnings reports, others may be lagging behind because of a scandal in the company.
However, this does not mean that all value funds comprise only low-valued stocks. They also contain some high-value stocks to lend balance to the returns. Let’s take the example of PPFAS Long Term Value Fund. Its core equity component consists of undervalued and little-known stocks such as Selan Exploration Technology, Noida Toll Bridge Company, Balkrishna Industries, Maharashtra Scooters and MT Educare. But it also holds high-value stocks such as Axis, ICICI and HDFC Banks. The scheme’s performance has been consistently above the NIFTY 500 average, at over 20% since its inception.
Other prominent value funds that have been doing well are: L&T India Value Fund, Templeton India Equity Income Fund, ICICI Prudential Value Discovery Fund, Birla Sun Life Pure Value Fund and UTI Master Value Fund.
Value funds are any stock funds on which investors are paid a dividend amount and the most common objective behind investing in a value fund is for receiving yields or income. They are hence, also referred to as ‘income funds’ as most investors wish to receive dividend payments as an income source and which is why many retired people opt for this kind of investment.
Advantages of Value Funds
In a volatile market environment, value funds offer greater risk-return proposition and in the recent times, has performed quite well as an investment option. Though there are chances of value funds underperforming during bull phases, these funds can fetch healthy returns over time. Here are a few more reasons why Value Funds are good in an investment portfolio:
- Most mutual fund portfolios focus on growth-oriented funds. Including value funds in your portfolio helps diversify your investments and ensure that all your eggs are not in the same basket.
- Value funds are a low-risk investment and add stability to your portfolio. Since they consist of stocks that are not part of the regular market upheaval, they cushion your portfolio from a sudden market topple.
- Value funds usually grow steadily irrespective of the fluctuations in the market. It is a sound investment method at times of a bearish market, when fund managers can buy stocks at a low price and sell them later at higher prices as the market starts bouncing back. .
- Value funds are good for investors who are looking for a slow and steady growth rather than quick growth in their portfolio, and also for the new entrants to the mutual fund market who want a safe investment venue.
Risks of Value Funds
- It is possible that some of the undervalued stocks present in the value fund may not appreciate at all, and had false alarms on potential. In such a case, the fund manager may have to sell off those stocks after a long wait at a loss. This is called the ‘value trap’.
- The slow growth of value funds can be frustrating. It may be years before certain stocks see a growth true to their potential. Therefore, value funds require a lot of time and patience.
- In a growth-driven market, higher-priced stocks are constantly traded more than the undervalued shares, thereby devaluing the shares further. Value funds tend to underperform because of insufficient investment in the high-valued funds.
Though there are risks associated with value funds, their advantages outweigh the risks and hence, experts recommend investors to at least invest 25% of their equity portfolio on value funds.
A fund manager researches the market carefully to identify stocks that may be currently trading at low prices and are being overlooked, but have an inherent value that has not been realised yet. Therefore, while investing in a value fund, it is always advised that investors seek the guidance of a mutual fund advisor/manager. Based on that, the investor may choose to have a value fund in their portfolio both as a safety cushion and to add diversity to his/her portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.