What are Value Funds?
Value fund is defined as an open-ended fund that adopts value style of investing. Under, value investing, the fund seeks to invest in companies that are trading at a considerable discount to their intrinsic valuation. Before we delve deeper into value funds, let us discuss value style of investing.
As highlighted above, value investing is a type of investment strategy under which an investor seeks to find stocks of companies that are trading at a significant discount to its intrinsic value.
Does value investing differ from growth investing?
Value investing is different than growth style of investing. In growth style, an investor looks for companies that have strong earnings growth potential. This kind of investing strategy is typically following in an economy that is young and is growing at a rapid pace.
For example, India is an economy where growth style of investing is very prominent as we have sectors that are undergoing revolutionary changes thereby resulting in rapid earnings growth for companies pioneering this change.
Benefits of Value Investing
Value investing offers a higher degree of safety. The strategy entails investing in companies that are undervalued. Undervalued here means companies that are trading at a lower Price to Earnings (P/E) or Price to Book ratio (P/B) compared to the industry average or peers. Thus, in value funds, one can see the overall portfolio P/E to be considerably lower when compared to standard funds.
Also, value investing is a long-term strategy and requires a high degree of patience. Underlying thesis in value investing is investing in a company that has the capability of generating high and sustained cash flows over a long term. It merely means that you should pay less for something that may turn out to be more valuable in the future. It is based on the proverb – price is what you pay value is what you get. Due to the long-term nature, value investing has a low turnover as compared to the standard mutual funds . This is because an investor tends to remain invested for long-term in stocks that are generating more value for them than the price they have paid.
Advantages of value investing /value funds
One of the advantages of value funds is that it benefits from lower downside risk and also lower volatility when compared to other equity funds.
Also, value investing tends to offer a better risk-reward profile in a volatile or overvalued market.
Top 3 Value Funds
|Name of the Fund||1 Yr Return (%)||3 Yr Return (%)||5 Yr Return (%)||Risk||Minimum SIP Investment|
|L&T India Value Fund||-13.94||11.78||22.72||Moderately High||500|
|ICICI Prudential Value Discover Fund||-4.97||9.71||19.00||Moderately High||100|
|Parag Parikh Long Term Equity Fund (previously known as Parag Parikh Long Term Value Fund)||-1.42||11.68||16.60||Moderately High||1,000|
L&T India Value Fund
Venugopal Manghat and Karan Desai manage L&T India Value Fund. The fund seeks to provide long-term capital appreciation by investing in a portfolio of undervalued stocks. The fund is market cap agnostic and typically holds 35-40% in large caps, 25-40% in midcaps and remaining in small caps. The fund has been able to generate good returns over the multi-trailing period and has high protection from downside risk as reflected in higher Sortino Ratio.
ICICI Prudential Value Discovery Fund
Mrinal Singh manages the fund with the objective of investing in value stocks that have an attractive valuation. The fund deviates from pure value investment strategy and seeks to identify growth names at an attractive valuation. Over three-fourths of the portfolio is invested in large caps; the remainder is in midcaps. The fund has been able to deliver good returns over the multi-trailing period with a marginally higher Sortino ratio when compared to the benchmark. This ensures higher safeguarding to downward movement.
Parag Parikh Long Term Equity Fund
Mr. Parag Parikh has been one of the proponents of value investing in India. His firm Parag Parikh Financial Advisory Services Ltd manages the Parag Parikh Long Term Equity Fund. This fund was previously known as Parag Parikh Long Term Value Fund. The fund seeks to provide long-term capital appreciation using a value investing approach. The fund is ably led by Rajeev Thakkar, Raunak Onkar, and Raj Mehta.
The fund invests less than a quarter in foreign equities and has remained true to its value investing philosophy as reflected in low volatility and higher protection from downside risk.
To conclude, we believe value investing approach has empowered individuals to scout for stocks/funds that are cheap but warrants higher value. This, in turn, has resulted in good wealth creation opportunity over the long-term. Value investing is most suited to individuals who are long-term players and patiently remain invested with their funds/stocks and do not get carried away by their emotions.