All about Value Funds!

Value funds invest in any stocks by adopting a strategy that has less market value and high intrinsic value.

We live in a world where an individual has various options to park his funds but presently, individuals are in a dilemma where to invest their hard-earned money and receive optimal benefits from the same. Mutual funds offer various schemes where every type of individual can invest his corpus such as equity-oriented schemes, non-equity-oriented funds i.e., debt funds, a combination of both equity and non-equity-oriented funds i.e., hybrid funds as well as solution-oriented funds for long term goals such as retirement and children’s raising expenses. Equity-oriented funds are further divided into 11 sub-categories such as value funds, contra funds, focussed funds, and many more.

We are going to discuss value funds in this article.

Value funds are equity-oriented mutual funds, which invest in the stocks of the company that has ‘value’. What is meant by value? There are various ways in which value is defined. To value the company's stock, various metrics are used like price-to-earnings ratio (P/E ratio), price-to-book ratio (P/B ratio), dividend yield, and free cash flow. So, value funds invest in stocks that score relatively lower in the above ratio. When a fund manager adopts a value investing strategy, he looks for stocks that are undervalued or may trade for less than their intrinsic value. These stocks have the potential to grow in the future. When the intrinsic value of any stock or company is more than its market value it is known as value. Hence, fund managers of value funds search, analyse and then invest in such value companies.

Things to consider before investing:

Risk: As these funds are equity-oriented, they are risky but less than growth funds. These funds are not for the risk-averse investors but for those, who are more suitable for investors that are ready to take risks. These funds face market risk and volatility like any other equity fund. Value funds tend to outperform during bear markets.

Investment horizon: Fund managers invest in stocks that are undervalued and can take some time to deliver returns. So, investors, who are willing to invest for a longer period, should consider investing in these funds. Investors should at least have an investment horizon of five years. This will help investors to receive optimal returns.

Diversification: Fund managers invest in stocks of large-cap as well as mid-cap companies and also, pool a corpus of investors in various sectors, which help investors to reap optimum benefit even if any particular sector is not performing well.

Returns: Fund managers analyse and forecast the performance of the undervalued companies in the market and invest the capital of investors in companies having higher potential. Investors, who want regular investments, should consider investing in these funds. Dividends are paid periodically, depending upon the performance of the fund. These funds offer steady returns over a longer period. Due to the lower cost of these funds, they are quite cheaper than growth funds.

Taxability: As these funds are equity-oriented, they will be taxed accordingly-

Short-term capital gains (STCG): If capital gains arise within 12 months, then they will be taxed as per short-term capital gains at the rate of 15%.

Long-term capital gains (LTCG): If capital gains are arising after 1 year, then they will be exempted up to Rs 1 lakh while above Rs 1 lakh, it will be taxed at the rate of 10% without indexation.

The following table depicts the top five value funds in India based on a one-year return along with their AUM: