Value funds are open-ended equity funds that invest in undervalued shares. Meaning, these shares are worth more than their current value and may grow significantly over the years. The reason behind the lower value could be the financial situation, changes in the business model, funding of large in-house projects, or market competition. These factors temporarily affect the value of the company, which gets restored eventually.
So, the underlying shares will be of organizations that have high reputations and established businesses. Read along to find out who should invest in value funds.
As per SEBI guidelines, fund managers must invest at least 65% of total assets in undervalued(equity) shares. Fund managers analyze the company’s growth plan before including the stock in the fund portfolio.
For example, ICICI Prudential Value Discovery Direct Growth has invested in shares of companies like Infosys, Reliance Industries, Bharti Airtel, Axis Bank, HDFC Bank, SBI to name a few.
You purchase the stocks of companies at a discounted price with Value funds. Sooner or later, these companies will reach their true potential and beyond. The shares that are undervalued today will grow significantly over the years. You have to wait for the value to restore by staying invested for the long term.
Fund managers strategically bring undervalued stocks into the scheme. You enter the fund when the underlying stocks are underperforming. But, these organizations have a good reputation and great track record. Therefore, the market conditions have a lower impact on these funds.
Equity funds can fluctuate frequently over a short duration. However, any equity fund is less volatile when you hold your investment for more than 5 years or so. In the case of value funds, there’s more possibility of value increment over a longer horizon. Holding your investment for at least 5 years can balance the risk of volatility.
You may have to hold your investment longer than any other equity funds. 4 to 5 years are ideal to beat volatility. However, it may take longer than that to reach the desired value. Be prepared to lock your money for 5+ years to benefit from significant growth.
The value investment strategy may have large-cap companies or small/mid-cap companies for diversification. The allocation across the market cap will impact the overall risk of the fund. You may want to consider exploring underlying assets to ensure that the fund objective aligns with your portfolio.
Evaluate the performance of the funds over a longer duration during various market cycles. That’ll give you an idea of the fund manager’s value investment strategy and capability to deliver returns.
Fund houses charge investors a fee in the form of an expense ratio to manage funds. As per SEBI regulations, the expense ratio ranges from 0.8% to 2.25% depending on the assets under management of the fund. You may want to be aware of this fee beforehand to calculate the expected returns.
Value funds are equity mutual funds, therefore, follow equity taxation.
Investors have to pay a 20% tax on Short-Term Capital Gains(investments redeemed before 12 months).
Long-Term Capital Gains (investments redeemed after 12 months) will be taxed at 12.5% above 1.25 lakhs.
To lower tax liability, hold your investment for a longer duration.
Patience is the key while investing in Value funds. You may have to wait for years to gain significant wealth. Investors who are comfortable with a longer horizon, preferably more than 5 years, can invest in value funds. Invest your money and wait for it to steadily grow.
Investors with moderate to high-risk appetites can take a bet on value funds to explore the potential of the scheme.
Technically speaking, value funds invest in companies having value. Value funds are less vulnerable to market volatility, offering downside protection. Therefore, these funds can significantly contribute to your wealth-building journey. You can start an SIP with a growth value fund for a longer horizon. But before that, talk to your financial advisor.
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