Seeking Long-Term Growth: Are Value Mutual Funds Right for You?
16 July, 2024
Synopsis
Value mutual funds focus on identifying undervalued stocks with strong growth potential, offering investors a chance to benefit from market inefficiencies.
These funds employ a bottom-up approach for stock picking, analysing various factors to estimate a company's fair value and create a concentrated portfolio of high-conviction stocks.
Value funds can provide diversification, cushion against volatility, and deliver healthy long-term returns, but require patience as the investment style may go through periods of below par performances.
Imagine you're an art collector scouring flea markets and garage sales for hidden gems. Your trained eye spots a dusty, unassuming painting tucked away in a corner. To the untrained eye, it's just another forgettable canvas. But you recognise the distinct brushstrokes of a master artist whose works typically sell for millions. You swiftly acquire the undervalued masterpiece for a fraction of its worth.
This is the essence of value investing – spotting undervalued assets with immense potential that others have overlooked or underappreciated. Just as an art specialist can mine priceless treasures in unlikely places, value investors seek out companies whose intrinsic value far exceeds their current market valuation.
What is Value Mutual Funds?
Suppose there is a smartphone sale, and you want to buy a phone. If you are not tech-savvy, many questions start haunting you: Am I paying the right price? Are the technical specifications good? Ultimately, you decide to take your tech-savvy friend to make the right choice. But the chosen phone may be beyond your budget! A similar situation can also happen in the stock market – first, you are unable to locate the right stocks, and even if you find one, it may not suit your pocket. So, enter the Value Mutual Funds! Like your tech-savvy friend, these funds are experts and can easily hunt hidden gems for you. You can own these hidden gems by investing just ₹500, irrespective of the market price! In essence, Value Mutual Funds are value hunters who hunt the undervalued stocks with great potential for you. In markets, there are stocks whose market value may be much less than they deserve based on their performance. Mutual funds investing in undervalued stocks with big upside potential are known as Value Mutual Funds.
Value mutual funds are run by professional money managers who dig deep to identify promising, undervalued stocks.
Their mission is to find diamond-in-the-rough companies that may be out of favour but have strong fundamentals and big upside potential. It takes skill, discipline, and contrarian thinking, but getting in early on an undervalued stock before it gets re-priced higher can deliver stellar returns over time. The big question is: Are you up for an investment strategy that zigs when the market zags?
What Is Value Investing?
Value investing is an investment strategy popularised by Benjamin Graham and Warren Buffet. It involves picking stocks that appear to be trading at valuations lower than their inherent worth after a thorough fundamental analysis.
Its purpose is to invest in stocks with unrecognised growth potential available at bargain prices. The market eventually recognises such stocks' genuine value, leading to price appreciation and gains for investors.
How Do Value Mutual Funds Work?
Value funds deploy a bottom-up approach to stock picking. The fund manager analyses financial statements, management quality, competitive positioning, and growth prospects to estimate companies' fair value and create the best value mutual funds bucket. Stocks trading at a significant discount to intrinsic value with limited downside are included in the portfolio.
The portfolio is concentrated on 30-50 such high-conviction stock picks across market caps and sectors. Value funds stay invested for long periods and avoid churn. The fund manager realigns the portfolio periodically to replace stocks close to fair value with new value picks.
Why Invest in Value Mutual Funds?
Here are some of the benefits of value fund investing:
Gain from under-pricing: Value funds profit from the market's delayed realisation of the stock's actual worth
Cushion against volatility: Value stocks have limited downside, being already undervalued
Healthy returns: Value funds have delivered inflation-beating trailing returns
Diversification: Value funds invest across sectors, providing balanced exposure
Low correlation: Value funds have a low correlation with growth-style funds
Things To Consider While Choosing the Best Value Funds
While evaluating value mutual funds, some parameters to consider are:
Fund manager's experience in value investing
Long-term performance across market cycles
Portfolio concentration and stock valuation discipline
Downside protection ability during market declines
Expense ratio and exit load structure
Build a balanced mutual fund portfolio with a blend of growth and value funds to take advantage of different investment styles.
Value mutual funds aim to capture upside from stock mispricing through prudent stock selection. They can provide healthy diversification and stability during equity market volatility. However, value investing requires patience when the style is out of favour. Value funds can reward long-term investors by uncovering hidden gems with solid earnings potential.
Using the HDFC Bank SmartWealth App, you can start investing in Value Mutual Fund with a few steps. You can download this app from the Playstore or App Store.
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