What are Value Funds?

Imagine you walk into a store and see a designer jacket that initially costs ₹10,000 but is now selling for ₹5,000. You check the material, the brand, and the fit—it’s perfect. You just got a great deal and value for your money. In the mutual fund parlance, value funds work on the same lines. Let’s dig deep to further understand what are value funds and their various attributes.

Meaning of Value Funds

Value funds are mutual funds that invest in stocks of undervalued companies. In simple terms, they buy shares of companies with strong fundamentals but temporarily out of favour. The idea is that over time, these stocks will regain their true worth, and once they do, they will reward investors.

Why Should You Care About Value Mutual Funds?

The stock market is unpredictable. One day, your portfolio looks like a dream, and the next, you question your investment decision when the market tanks. However, the good thing about value mutual funds is that they focus on long-term gains.

These funds don’t chase trending stocks or get swayed by hype. Instead, they look for strong companies that are currently underpriced but have solid fundamentals. Think of it as picking a diamond from the rough. Over time as the market realises their worth, the stocks in which the fund has invested tend to appreciate, thus rewarding your patience.

Features and Benefits of Value Funds

• Investment in Undervalued Stocks

Following the value investment strategy, the fund manager analyses the financial statements and growth prospects of several companies, selecting the one trading below its intrinsic value.

• Long-term Growth Potential

Since value funds invest in undervalued stocks, they may take time to reach their full potential. However, they hold long-term growth potential. On average, they delivered returns of over 21% in 2024, with a nearly 20% return over the past three years.

It’s probably this long-term growth potential which has pushed inflows in value funds from ₹ 11,927 crores to ₹22,757 crore in 2024.

• Diversification

The time-tested investing principle, value mutual funds typically invest across different sectors and industries, reducing overall portfolio risk. This diversification helps balance the impact of underperforming stocks.

Risks Associated With Value Funds

Before investing in value funds, let’s talk about the other side of the coin - risk. Value funds do carry some amount of risk. These include:

• Markets Taking its Own Time

Just because a stock is undervalued today doesn’t mean it will bounce back tomorrow, next month, or even next year. The market has a mind of its own. Sometimes, it takes years for a value mutual fund to deliver returns as expected.

• Risk of Value Trap

A value fund is prone to value traps. While the stock may look promising, it may be losing value due to poor management, high debt, etc.

Key Factors to Consider Before Investing in Value Funds

• Check the Fund’s Previous Track Record

Not all value funds perform well. Look at the fund’s historical performance, but don’t just chase past returns. Instead, see how it has fared in different market conditions. A value fund should deliver consistent returns over the long term rather than just performing well in bullish markets.

• Expense Ratio Matters

Even a small difference in the expense ratio (fund management fees) can significantly impact your returns over time. Always compare costs across different value funds and ensure you’re not paying excessive fees for subpar performance.

• Who’s Managing the Fund

A skilled fund manager can make a big difference. Look at the fund manager’s experience, investment strategy, and how they have handled past market downturns. A strong, disciplined approach to value investing is essential.

Taxation of Value Funds

Value mutual funds are equity-oriented and hence taxed accordingly. Long-term capital gains above ₹1.25 lakhs in a financial year are taxed at 12.5% without indexation, while short-term capital gains are taxed at 20% .

Are Value Funds Right for You?

If you’re someone who can stay invested for the long haul and not panic at every market dip, then these funds could be a great addition to your portfolio.

Conclusion

Value mutual funds let you invest in quality companies at discounted prices and reward you when the market corrects itself. However, it’s equally essential for you to do your research, factor in your financial goals, and consider your risk tolerance before investing in these funds.