Value funds are funds that follow a value investment strategy when selecting stocks. The value investing strategy invests in undervalued equity stocks across market capitalization and sectors. Undervalued equity stocks are the ones that are trading at a lower price in the market than their intrinsic value.
Generally, value stocks have a high dividend yield and a low P/E (price to earnings) ratio, and they are priced at a discount. Although the stocks are currently trading at a discount, they have the potential to grow investors’ wealth in the long term. The idea behind value investing is that, due to several reasons, the market may have some inherent inefficiencies that allow particular firms to sell stocks at rates below their actual value. The value fund manager identifies these market inefficiencies. To better understand this fund, you can read this article.
Value Fund Meaning
Value funds are open-ended mutual funds that invest in stocks that are deemed to be undervalued. In a value investing strategy, the fund manager looks for the stocks that are undervalued and trades for less than their intrinsic values. An example of such a fund is the Axis Value Fund. It is an open-ended equity scheme that follows a value investment strategy. You can invest in this fund using a mutual fund app.
In the market, there are several companies whose stock price is not the true indicator of their worth. Companies are intrinsically more valuable and may have the potential to grow. The fund manager identifies such companies by analyzing their finance, business model, competitive position, management team, etc. After analyzing the company, if its market value is less than its intrinsic value, then it is considered to have value.
Often, value investing is contrasted with growth investing, which focuses on emerging companies with high growth prospects. Value funds can be considered by investors who have a high-risk appetite and are willing to stay invested for the long term.
Benefits of Investing in Value Fund
Investors with a high-risk tolerance and willing to stay invested for the long term can benefit from the value fund. These funds can provide benefits in the following ways:
- Reduce Portfolio Risk: Even though the asset allocation in value funds is concentrated mostly in growth-oriented equity stocks, investors can get exposure to a diversified portfolio. A portfolio of undervalued stocks from various sectors and across different market capitalizations can reduce the overall risk level.
Keep in mind that no two sectors or stocks will have the same risk level. Stocks from different sectors may perform differently in different economic conditions. However, a well-diversified portfolio helps to reduce the overall risk of equity investment to some extent.
- Market Volatility: Like all equity-oriented schemes, value funds are subject to short-term market fluctuations. However, when compared to growth stocks, value stocks are somewhat less prone to market volatility. Even so, value equity funds are still subject to significant short-term volatility.
- Potential to Provide Long-term Gains: Value Mutual funds may provide long-term gains over a long investment tenure. Basically, the true market value of these stocks is realized over a long time frame. Because of this, value funds are a suitable choice when investing for long-term goals like retirement, buying a new house, setting aside money for your kids’ education, etc.
- Potential for Higher Risk-Adjusted Returns: Value funds invest in stocks that are undervalued and have already seen their prices decline. The beta (market risk) of these schemes is much lower than the beta (market risk) of the broader market. Thus, value fund schemes have a higher chance of generating long-term risk-adjusted returns.
Conclusion
Value funds invest in undervalued stocks that have the potential for long-term growth. By adopting a value investment strategy, these funds seek out stocks that are trading at lower prices than their intrinsic value. These funds can provide benefits such as reducing portfolio risk through diversification across sectors and market capitalization. The fund is suitable for investors with a high-risk tolerance and a long-term investment horizon. Investors can use a mutual fund app to invest in funds. Be sure to research the fund and analyze your investment goals and risk appetite before investing.
Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
Past performance may or may not be sustained in future.
Mutual Fund Investments are subject to market risks; read all scheme-related documents carefully.
Read more on KulFiy