Mutual Fund Value Investing: Where Does Your Money Go?

Value mutual funds are a type of investment vehicle that pools money from multiple investors to purchase a portfolio of stocks that are deemed to be undervalued based on fundamental characteristics. The underlying assumption is that these stocks are traded below their intrinsic value due to temporary factors and will provide higher returns in the long run when the market realises their true value. Value funds are often contrasted with growth funds, which focus on emerging companies with high growth potential. Value funds are typically used as long-term investment allocations and are associated with investment due diligence and patience. They are suitable for investors with a high-risk appetite, those seeking to diversify their holdings, and those with a long-term investment horizon.

Undervalued stocks

Value funds are a type of mutual fund that invests in stocks that are undervalued in price based on fundamental characteristics. They are often contrasted with growth investing, which focuses on emerging companies with high growth potential. Value funds are typically used as long-term investment allocations that have the potential to grow steadily over time.

When determining whether a stock is undervalued, fund managers consider a variety of factors, including a company's financials, business model, competitive position, and management team. If the company's market value is less than its intrinsic value, it is considered a good investment. These stocks are often from well-established companies that offer dividend payments.

Value funds provide investors with a diverse portfolio of growth-oriented stocks. They are suitable for investors who have a long-term investment horizon, a high exposure to growth stocks, and a high-risk appetite.

There are several benefits to investing in value funds, including portfolio diversification, lower downside risk, and high-growth potential. Value funds invest in undervalued stocks across different sectors, helping to reduce risk. Since these stocks are already undervalued, they are also less impacted by a bearish market. Over the long term, value funds have the potential to significantly multiply investors' wealth.

However, there are also risks associated with investing in value funds. The stock price discovery process can take longer than expected, and some stocks may not perform as estimated, impacting your investment portfolio. Additionally, value funds are subject to market risks and can be impacted by economic factors and interest rate changes.

Long-term investment

Value mutual funds are a great option for long-term investments. They are a type of equity fund that invests in stocks of companies that are considered undervalued in price based on their fundamental characteristics. The underlying assumption is that these stocks are undervalued due to temporary factors and will provide higher returns compared to peers once their valuation is at par with the market.

Value funds are ideal for investors who have advanced knowledge of macro trends and are willing to take on selective bets for higher returns, even if the overall market is performing better. These funds are also suitable for investors with a longer investment horizon, those with high exposure to growth stocks, and those who understand the patience required in value investing.

When investing in value mutual funds for the long term, it is important to keep in mind that these funds are subject to market timing risks, economic factors, and interest rate risks. Additionally, fees and expenses associated with mutual funds can impact your overall returns.

• The Vanguard Equity-Income Fund Investor Shares (VEIPX): This fund focuses on investing in large-cap companies that pay investors above-average dividends and is best suited for investors seeking higher yields with a long-term investment horizon.
• The ClearBridge Large Cap Value Fund (SAIFX): This actively managed value fund seeks capital appreciation and income through a value-focused investing strategy, offering multiple share classes and consistent quarterly dividend payments.
• The Invesco S&P 500 Enhanced Value ETF (SPVU): This fund tracks the performance of the S&P 500 Enhanced Value Index, investing at least 90% of its assets in stocks that are part of this index, which are undervalued based on fundamental analysis.
• The iShares Edge MSCI USA Value Factor ETF (VLUE): This index fund seeks to replicate the holdings and return of the MSCI USA Enhanced Value Index, which includes US large- and mid-cap stocks with value characteristics trading at a comparatively low valuation.

By investing in value mutual funds for the long term, you can benefit from the potential steady growth of these funds over time as the market recognizes the true worth of the undervalued stocks they invest in.

High-risk appetite

If you have a high-risk appetite, you may be interested in high-risk mutual funds, which have a significant risk-reward dynamic compared to other mutual funds. These funds are suitable for investors with in-depth knowledge of the market and a good understanding of macroeconomic trends.

High-risk funds predominantly invest in stocks or bonds of developing or growing companies, and they can be categorised as balanced advantage schemes, credit risk fund schemes, equity hybrid fund schemes, etc. They involve significant volatility but also offer sizeable returns.

• Quant Multi-Asset Fund
• HDFC Balanced Advantage Fund
• ICICI Prudential Bharat Consumption Fund
• Nippon India Asset Allocator FoF Fund
• HDFC Dynamic PE Ratio FoF Fund
• ICICI Prudential Asset Allocator Fund
• SBI Conservative Hybrid Fund
• Sundaram Equity Hybrid Fund
• HDFC Asset Allocator FoF Fund

These funds are best suited for investors with a strong risk appetite who are willing to expose their portfolio to volatility to generate higher earnings. They usually offer more significant returns over a long time horizon, as the underlying bonds and stocks are mostly from companies in their growth phase.

Before investing in high-risk mutual funds, it is important to consider your investment goals, risk profile, the fund's performance, expense ratio, and whether you choose a direct or regular plan.

Diversification

By investing in mutual funds, individuals can achieve diversification more quickly and cheaply than by purchasing individual securities. Mutual funds provide exposure to a variety of securities with different capitalizations and industries, as well as bonds with varying maturities and issuers. This diversification helps to reduce risk and is particularly attractive to investors.

Value funds, in particular, invest in stocks that are undervalued in price based on fundamental characteristics. These funds seek to identify stocks that are trading below their intrinsic value and are expected to increase in price once the market realizes their true value. By investing in a variety of undervalued stocks across different sectors, value funds can provide investors with a well-diversified portfolio.

Additionally, mutual funds are often managed by professional fund managers who have the expertise to identify and invest in a diverse range of securities. This further contributes to the diversification of the portfolio and can enhance the potential for long-term growth.

Overall, diversification is a key benefit of investing in mutual funds, especially value funds, as it helps to reduce risk and provide investors with access to a wide range of assets.

Growth potential

Value mutual funds are a type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks that are deemed to be undervalued in price based on fundamental characteristics. The underlying assumption is that these stocks are undervalued due to temporary factors and will provide higher returns compared to peers once their valuation is at par with the market.

Value funds are often contrasted with growth investing, which focuses on emerging companies with high growth prospects. Value funds are typically used as long-term investing allocations that have the potential to grow steadily over time.

Value fund managers look for stocks that are inexpensive due to market inefficiencies. These stocks may not be performing well in the market at the moment, but fund managers believe they have growth potential. The premise behind value investing is that once the market realises the true value of these stocks, the share price will increase, and the value fund investor will benefit from this increase.

Value funds provide investors with a diverse portfolio of growth-oriented stocks. They are suitable for investors who have a long-term investment horizon and are looking to diversify their holdings.

The main benefits of value funds are portfolio diversification and the potential for high growth over the long term. Value funds invest in undervalued stocks across different sectors, helping to spread risk and providing exposure to a range of companies with growth potential.

However, it is important to note that value funds carry certain risks. The performance of value funds may or may not improve in the future, and there is a possibility of underperformance or inaccurate analysis by the fund manager, which can result in downturns in the investment.

When considering investing in value funds, it is important to look at the fund's past performance, investment horizon, expense ratio, and the overall risk.

Frequently asked questions