What are Value Funds Definition and Advantages

What are Value Funds: Definition and advantages

Value Fund is a type of Mutual Fund that makes use of a value investing strategy, focusing on stocks that appear underpriced as compared to their true values. Investors who are looking for long-term growth prefer this investment strategy. In this blog, we will explore what Value Funds are, their unique characteristics and the advantages they offer to investors.

Understanding Value Funds

Value Funds are open-ended equity schemes that invest in stocks, which are undervalued in the market. The concept of value investing lies in identifying stocks that are being traded at prices lower than their intrinsic or book values. The belief is that these stocks, while currently undervalued due to various market factors have strong fundamentals and thus the potential to offer substantial returns in the long run.

The philosophy of value investing

Some of the most successful investors in the world including Warren Buffet use value investing as a strategy. It involves picking stocks that are being traded at less than their intrinsic values which are often overlooked by the market. The idea is to invest in these stocks and hold them over a period until their market prices align with their perceived true values.

Who should invest in Value Funds?

Value Funds are particularly suitable for:

Investors with an understanding of macroeconomic trends

Those who are willing to take calculated risks for higher returns

Long-term investors seeking steady growth rather than quick gains

Investors who are comfortable with short-term market fluctuations.

Benefits of Value Funds

Diversification:

Value Funds provide exposure to a diversified portfolio, mainly investing in growth-oriented Mutual Fund schemes

Reduced volatility:

Since these funds focus on undervalued stocks, they are often less vulnerable to market volatility

Potential for high returns:

By investing in stocks below their intrinsic values, Value Funds offer the potential for high returns in the long run

Margin of safety:

Value investing offers a margin of safety as investors purchase stocks at prices lower than their actual values, which can lead to substantial profit margins.

Investment strategy of Value Funds

Value Funds often invest in stocks that are undervalued by the market. The fund managers of these schemes conduct thorough research to identify stocks with strong fundamentals such as revenue, profitability and growth potential. The aim is to invest in these stocks and reap benefits when their true values are recognised in the market.

How Value Funds work

The concept of a Value Fund revolves around the principle of intrinsic value. For example, if a stock’s intrinsic value is estimated to be Rs <200> but it is currently trading at Rs <100>, the difference of Rs <100> is seen as the margin of safety. This margin offers investors a buffer against market downturns and a higher probability of profit when the stock’s price changes to reflect its true value.

Investing in Value Funds

Investors can choose to invest in Value Funds either through the offline mode by visiting fund houses, brokers or online with the help of Mutual Fund aggregator websites or Asset Management Companies (AMCs). ICICI Bank offers convenience and accessibility along with tools such as Mutual Fund Calculators to compare and evaluate different Value Fund schemes.

Value Funds in the current market

In the current market scenario, Value Funds have gained attention as they tend to perform well in a recovering economy. As markets stabilise and grow, undervalued stocks with solid fundamentals often see significant appreciation in values, benefitting Value Fund investors.

FAQs

Are Value Funds suitable for short-term investment?

Value Funds are generally more suitable for long-term investment horizons. They require time to realise the potential of undervalued stocks which may not align with short-term investment goals.

How do Value Funds differ from Growth Funds?

Value Funds focus on stocks that are undervalued and have potential for appreciation while Growth Funds target stocks with high growth potential irrespective of their current market valuation.

What are the risks of investing in Value Funds?

The primary risk of investing in Value Funds is the market risk associated with equity investing. Additionally, there is the risk that the fund's assessment of a stock's intrinsic value may not align with the market trends.

How can I start investing in Value Funds through ICICI Bank?

You can start investing in Value Funds offered by ICICI Bank either by visiting any branch, through the online banking platform or the iMobile Pay app.

Value Funds appeal to investors who are looking at sustainable growth with a relatively conservative approach. These funds, offered by institutions such as ICICI Bank can be an excellent addition to their investment portfolios.