Value funds are one of the most popular and convenient ways to invest in the stock market. They offer a variety of schemes to suit different risk profiles, investment objectives, and time horizons. One such category of mutual funds is value funds, which follow the value investing strategy.
What is a value-fund-investing strategy?
Value investing is an investment approach that gained prominence through influential figures such as Benjamin Graham and Warren Buffett. It involves buying stocks that are trading at a discount to their intrinsic value, i.e., their true worth based on their fundamentals. Value investors believe that the market often overreacts to news and events, creating temporary mispricing opportunities. By investing in undervalued stocks, they aim to benefit from the eventual correction of the market price to its fair value.
What are value funds?
Value funds are mutual fund schemes that follow the value investing strategy. They invest in stocks that are undervalued by the market based on various parameters like earnings, dividends, book value, cash flow, etc. Value funds look for companies that have strong business models, competitive advantages, growth potential, and financial stability but are ignored or neglected by the market for some reason. Value funds seek to identify such hidden gems and hold them for the long term until the market recognizes their true value.
What are the benefits and risks of value funds?
Value funds provide numerous advantages to investors, including:
Higher returns: Value funds have the potential to generate higher returns than the market or other categories of funds, as they buy stocks at a bargain and sell them at a premium. Value funds can also outperform in bearish or volatile markets, as they are less affected by market fluctuations.
Lower risk: Value funds have lower risk than growth funds, as they invest in stocks that are already trading at a discount. This provides a margin of safety, as the downside risk is limited. Value funds also have lower volatility, as they are less sensitive to market sentiments and fads.
Diversification: Value funds can add diversification to your portfolio, as they have a low correlation with other categories of funds. Value funds can also complement growth funds, as they perform well in different market cycles and valuation scenarios.
However, value funds also have some risks and challenges, such as:
Underperformance: Value funds may underperform the market or other categories of funds in bullish or momentum-driven markets, as they may miss out on the high-growth stocks that drive the market rally. Value funds may also take longer to deliver returns as they wait for the market to realize the true value of their stocks.
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Value trap: Value funds may fall into the value trap, i.e., buying stocks that are cheap for a reason and may never recover. Value funds may also misjudge the intrinsic value of a stock or the catalyst that will trigger a price correction. Value funds need to have a rigorous and disciplined approach to stock selection and valuation to avoid such pitfalls.
How do I invest in value funds?
You can invest in value funds through a lump sum or a systematic investment plan (SIP). A lump sum is a one-time investment where you invest a large amount at once. A SIP is a regular and disciplined investment where you invest a fixed amount every month or quarter. Both methods have their pros and cons, depending on your investment goal, risk appetite, and market conditions.
However, SIP is generally considered a better way to invest in value funds, as it offers the following advantages:
Rupee cost averaging: SIP helps you to average out the cost of your investment, as you buy more units when the price is low and fewer units when the price is high. This reduces the impact of market volatility and enhances your returns in the long run.
Power of compounding: SIP helps you harness the power of compounding as you reinvest your returns to generate more returns. This creates a snowball effect as your investment grows exponentially over time.
Financial discipline: SIP helps you maintain financial discipline as you invest regularly and systematically. This also helps you achieve your long-term financial goals as you save and invest before you spend.
Which are the best-value funds in India?
There are many value funds available in India, but not all of them may suit your investment needs and preferences. You need to consider various factors, such as the fund’s performance, risk, consistency, portfolio, expense ratio, fund manager, etc., before choosing a value fund. You can also use online tools and platforms, such as ET Money, Advisorkhoj, Cube, SIP Calculator, etc., to compare and analyze different value funds and select the best ones for you.
However, to give you a reference, here are some of the best-value funds in India, based on their 5-year returns as of January 31, 2024:
JM Value Fund: This fund has given a whopping 31.77% CAGR return in the last 5 years, making it the top performer in the value fund category. The fund invests in a diversified portfolio of undervalued stocks across market capitalizations, sectors, and themes. The fund has a high conviction approach and a concentrated portfolio of around 25–30 stocks. The fund has a relatively small size of Rs. 499 crore, which gives it the flexibility to invest in niche and emerging opportunities. The fund is managed by Karan Doshi and Jaiprakash Toshniwal.
Bandhan Sterling Value Fund: This fund has given a stellar 30.74% CAGR return in the last 5 years, making it the second-best performer in the value fund category. The fund invests in a mix of value and growth stocks, with a focus on the mid- and small-cap segments. The fund follows a bottom-up stock selection process with a rigorous valuation framework. The fund has a large size of Rs. 8,161 crore, which reflects its popularity and trust among investors. The fund is managed by Karan Doshi and Jaiprakash Toshniwal.
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Templeton India Value Fund: This fund has given a remarkable 30.42% CAGR return in the last 5 years, making it the third-best performer in the value fund category. The fund invests in a portfolio of undervalued stocks across market capitalizations, with a bias towards the large-cap segment. The fund follows a contrarian and long-term approach, with a low portfolio turnover. The fund has a moderate size of Rs. 1,728 crores, which gives it the ability to invest in both established and emerging value stocks. The fund is managed by Anand Radhakrishnan and Anand Vasudevan.
How much can you earn from value funds?
The returns from value funds depend on various factors, such as the fund’s performance, the market conditions, the investment amount, the investment duration, etc. However, to give you an idea, let us take an example of a value fund SIP.
Suppose you start a monthly SIP of Rs. 12,000 in the LIC MF Long Term Value Fund, which is one of the best value funds in India. The fund has given a 14.57% CAGR return since its inception in August 2018. If you continue your SIP for 10 years, you can expect to earn a corpus of Rs. 36.05 lakhs with a profit of Rs. 21.65 lakhs. This is assuming that the fund maintains its historical return rate, which may vary in the future.
The table below shows the SIP returns of the LIC MF Long Term Value Fund for different investment durations:
| Investment Duration | Total Investment | Total Value | Profit | XIRR |
|---|---|---|---|---|
| 5 years | Rs. 7.2 lakhs | Rs. 11.97 lakhs | Rs. 4.77 lakhs | 15.64% |
| 10 years | Rs. 14.4 lakhs | Rs. 36.05 lakhs | Rs. 21.65 lakhs | 14.57% |
| 15 years | Rs. 21.6 lakhs | Rs. 79.76 lakhs | Rs. 58.16 lakhs | 14.57% |
| 20 years | Rs. 28.8 lakhs | Rs. 163.87 lakhs | Rs. 135.07 lakhs | 14.57% |
LIC MF Long Term Value Fund: This fund has given a 33.6% CAGR return in the last 5 years, making it one of the best value funds in India. The fund invests in a portfolio of undervalued stocks across market capitalizations, with a focus on the large and mid-cap segments. The fund follows a bottom-up stock selection process with a long-term investment horizon. The fund has a small size of Rs. 104 crore, which gives it the advantage of investing in niche and emerging opportunities. The fund is managed by Yogesh Patil.
DSP Value Fund: This fund has given a 36.1% CAGR return in the last 5 years, making it one of the best value funds in India. The fund invests in a portfolio of undervalued stocks across market capitalizations, with a tilt towards the mid- and small-cap segments. The fund follows a contrarian and opportunistic approach with a flexible portfolio allocation. The fund has a moderate size of Rs. 776 crore, which reflects its popularity and trust among investors. The fund is managed by M. Suryanarayanan and Vinit Sambre.
Axis Value Fund: This fund has given a 26.8% CAGR return since its inception in December 2019, making it one of the best value funds in India. The fund invests in a portfolio of undervalued stocks across market capitalizations, with a bias towards the large-cap segment. The fund follows a value-oriented and research-driven approach, with a high-confidence portfolio of around 30–40 stocks. The fund has a large size of Rs. 455 crore, which reflects its growth potential and performance. The fund is managed by Jinesh Gopani and Hitesh Das.
What is the difference between a growth fund and a value fund?
A growth fund and a value fund are two types of mutual fund schemes that follow different investment strategies. The main difference between them is how they select and value the stocks in their portfolios.
A growth fund invests in stocks that have high growth potential, i.e., they are expected to grow faster than the market average or their peers. Growth funds look for companies that have strong earnings, revenue, and cash flow growth, as well as competitive advantages and innovative products or services. Growth funds are willing to pay a premium for such stocks, as they believe that their future performance will justify their high valuation. Growth funds aim to benefit from the price appreciation of their stocks rather than from dividends or income.
A value fund invests in stocks that are undervalued by the market, i.e., they are trading below their intrinsic value or fair price. Value funds look for companies that have solid fundamentals, such as earnings, dividends, book value, cash flow, etc., but are ignored or overlooked by the market for some reason. Value funds buy such stocks at a discount, as they believe that the market will eventually recognize their true value and correct their price. Value funds aim to benefit from both the price appreciation and the dividends or income of their stocks.
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Some of the advantages and disadvantages of growth funds and value funds are:
Growth funds can offer higher returns than value funds in bullish or momentum-driven markets, as they capture the high-growth stocks that drive the market rally. However, growth funds can also have higher risk and volatility than value funds, as they are more sensitive to market sentiments and fads. Growth funds can also underperform in bearish or volatile markets, as they are more prone to price corrections and losses.
Value funds can offer lower risk and volatility than growth funds, as they invest in stocks that are already trading at a low price. This provides a margin of safety, as the downside risk is limited. Value funds can also outperform in bearish or volatile markets, as they are less affected by market fluctuations. However, value funds can also have lower returns than growth funds in bullish or momentum-driven markets, as they may miss out on the high-growth stocks that drive the market rally. Value funds can also take longer to deliver returns as they wait for the market to realize the true value of their stocks.
Therefore, the choice between growth funds and value funds depends on your investment objective, risk appetite, time horizon, and market conditions. You can also invest in a combination of both growth and value funds to diversify your portfolio and balance your risk and return.
