Value Funds: Meaning, Returns, Risks & More

Have you ever bought a product that made you think “It is so cheap for the value it offers”? If so, you have experienced a glimpse of the concept behind ‘value investing’.

Value funds use the same strategy of ‘value investing’ with the aim of acquiring undervalued financial assets below their intrinsic worth. Keep reading for an in-depth understanding of value mutual funds!

What Is A Value Fund?

Value mutual funds got their name based on their investment strategy called “value investing”. It is a strategy to find companies whose stock price is less than their intrinsic value and have the potential to grow.

What is the Intrinsic Value of Stock? A stock’s intrinsic value is an estimate of its true worth based on the company’s fundamentals and future cash flow potential. It is used to evaluate whether a stock is overvalued or undervalued.

To conclude, mutual funds that adopt a ‘value investment strategy’ and allocate at least 65% of their assets in stocks of undervalued companies are referred to as value funds.

Value Funds Vs Growth Funds

The basic difference between the two is their investment styles. Value funds invest in stocks of companies that appear to be undervalued, as assessed through fundamental analysis.

On the other hand, Growth funds invest in stocks of companies with above-average growth potential with an aim to deliver higher returns to investors. They often invest in companies operating in emerging industries.

Value Funds Vs Contra Funds

Value funds adopt a ‘value investing’ strategy while contra funds adopt a ‘contrarian strategy’ of investing. Contrarian strategy dares to invest against market trends and sentiments.

In contra funds, fund managers identify undervalued stocks that are underperforming due to some temporary issues. Addressing these issues can improve stock performances and produce significant returns.

Best Performing Value Funds

Based on 5-year past performance, here is a list of value funds. Even if past performance is a crucial factor in fund selection, it is not the only factor. Investors must consider other factors to select a fit mutual fund.

Risks And Returns Of Value Funds

Value funds have the potential to generate higher returns than some other types of mutual funds such as growth funds etc. But these funds also carry specific risks.

If some of the chosen stocks remain undervalued or continue to decline, the fund may generate below-average or even negative returns. This condition is referred to as a ‘value trap’.

Appropriate selections of stocks can lead to good returns, but poor decisions may affect the returns negatively. Thus, value funds carry management risks.

The prices of undervalued stocks fluctuate more in the short term, showing higher volatility. Therefore, these funds may not be good choices for investors with short-term perspectives.

Important Considerations

Value funds are considered highly risky equity schemes. Therefore, investors must select a well-diversified fund to balance out risks. Being well-diversified does not mean over-diversification as that may mislead the fund from its purpose.

Value funds hold undervalued stocks. The reason behind undervaluation for different stocks may vary. Some companies may take longer than others to perform well.

Past performance is a good indicator of how the fund performed in the last 1, 2, 3, & 5 years. Additionally, comparing past performance against the benchmark holds equal weight.

To sum it up, investors who are immune to short-term fluctuations, have a good risk appetite and a long-term investment horizon may find value mutual funds an attractive investment option.

FAQs – Value Funds