Value Funds - Benefits & Factors to consider while investing

Value investing is an investment style where you invest in good undervalued companies and hold them for an extended period, preferably five years or more. Value mutual funds follow this investment principle to create long-term wealth for the investors.

A value fund is an equity mutual fund that predominantly invests in stocks that are presently undervalued but have the potential to give high returns in future. Benjamin Graham first popularised the concept of value investing in his 1949 bestselling book "The Intelligent Investor", and many legendary investors and fund managers like Warren Buffet, Peter Lynch, etc., have since successfully adopted this investment practice.The underlying principle of value investing is that a company's stock price can be undervalued for various reasons in the short term. However, such companies can provide higher returns in the long run once the market recognises their actual value and their stock price increase accordingly.

• Less Volatile
  Value funds invest in undervalued stocks that usually don’t show significant movement daily. Hence they remain out of the focus of short-term traders and analysts. Therefore, they are relatively less volatile.Moreover, such stocks witness lesser price corrections in a significant market fall.
• Portfolio Diversification Value mutual funds invest in a wide range of undervalued stocks across different industries. Besides, investors with high exposure to growth stocks can include value funds into their portfolios to have a well-balanced, diversified investment portfolio.
• Catching Potential Gems Since fund managers of value funds are always on the lookout for stocks with hidden potential, they are more likely to find quality stocks that can provide multi-bagger returns in future. For instance, many large-cap stocks like HDFC Bank, Infosys, etc., were once undervalued until becoming great wealth creators.
• Margin of Safety Value mutual funds always try to buy a stock with an ample margin of safety, which is the difference between the stock's intrinsic value and its current market price.For example, suppose that the fundamentals of a stock suggest that it should have a price of Rs 500. However, the stock is presently trading at Rs 100.Therefore, the value mutual fund that buys the stock at Rs 100 has a margin of safety of Rs 400 (500-100). This will significantly increase the chances of a higher profit margin for the fund in future.

Value Mutual funds can be ideal for you if you adhere to the following investment mindset.

• Long-term Investment Horizon If you are someone who can remain oblivious of the short-term market volatilities and stay invested for the long term, you can consider investing in a value fund.
• Lack of Time for Value Investing You may believe in value investing, but you might not have enough time to research stocks or perform in-depth fundamental analyses of companies to find the hidden gems. Besides, you might not have the required expertise for stock picking, although you have advanced knowledge of macro trends.In such as scenario, you can consider investing in value mutual funds where the fund manager of that scheme will do all the research and stock picking for you while you get all the benefits of value investing.
• Patience Is the Key Value mutual funds are not some get-rich-quick schemes. Long term investing requires a lot of patience and financial discipline.You need to ignore the everyday noises in the form of global news, movement of market indices, multiple business channels giving buy and sell calls, etc.Moreover, the market can undergo many phases of corrections during a five to ten years period. Therefore, you should be disciplined enough to stay invested and keep building your portfolio through SIPs.
• Appetite for Calculated Risk Building wealth while protecting the capital is one of the main objectives of value funds . Such funds invest in stocks after performing due diligence and their past performance as well.Still, some macroeconomic factors and global events like war can always pull down the fund performance in the near term. Therefore, value fund investors should be ready to take calculated risks in troubled times and refrain from panic selling.
• Stir Away From Herd Mentality A stock automatically becomes overvalued if many people start buying it, pushing its price upward. Value investors never blindly follow the market sentiments and buy a stock just because others are buying.On the contrary, value investors stay clear of popular stocks of the day and invest in undervalued stocks based on their own research.

While investing in value mutual funds can always be a wise decision, you should consider the following factors to identify a good fund.

• ○The average percentage of return given by the fund over ten years.
• ○Selection of stocks in the scheme portfolio.
• ○Has the fund stuck with its declared investment objective over the years?

• Past Performance Past performance of the fund matters a lot as you will be investing for a considerably long period. The past performance indicates how well the fund has managed its assets over various market cycles. You don’t need to look into returns on every quarter as quarterly returns can often project a volatile picture.Instead, look for the following indicators.
• You can make a confident decision after analysing the points mentioned above.
• Weightage The investment profile of an ideal value fund will have a healthy combination of stocks with different market capitalisation. For instance, the maximum weightage can be in large-cap stocks followed by mid-cap and small-cap stocks.

Value investing is a time-tested formula of wealth creation, and value funds can provide you with an excellent opportunity to draw its benefits. All you need is to make up your mind and begin your investment journey now.A few years down the line, you might look back and find this as one of your best financial decisions ever.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.