Investing with purpose: Top 10 best-performing value funds

Value mutual funds invest in stocks perceived as undervalued based on their fundamental attributes.

What are value funds?

Value mutual funds invest in stocks perceived as undervalued based on their fundamental attributes. These are open-ended equity schemes embracing a value investment approach, targeting shares of companies available at a discount. Investors are drawn to these stocks because they might be underrated due to short-term factors, yet offer substantial long-term returns.

It's crucial to distinguish value funds from contra funds; while contra funds focus on stocks currently out of favour, value funds look for stocks trading beneath their true worth. 

Ideal investors for value funds 

Value funds are best suited for individuals who are:

• Prepared to invest for the long term, allowing time for the selected stocks to achieve their growth potential.
• Looking to diversify with solid returns across different market cycles, especially if they already have a significant allocation in growth stocks.
• Open to the possibility of varying future fund performance and possess the capacity to handle investment risks.

Advantages of investing in value mutual funds

• Portfolio Diversification: Investing in undervalued stocks across various sectors, providing a well-rounded portfolio with a balanced risk-reward ratio.
• Reduced Downside Risk: Value mutual funds typically face lower volatility and risk in bear markets, as the stocks are already undervalued.
• High Growth Potential: These funds can significantly increase investors' wealth and enhance portfolio value over time.
• Flexible Investment Options: Investors can choose between lump-sum investments or systematic investment plans (SIPs), allowing for regular, fixed instalments. While the minimum for a lump sum might be around Rs 1,000, SIPs can start from as low as Rs 100, though this minimum can vary by scheme.

Risks of Investing in Value Funds

• The time it might take for stock prices to reflect their true value could be longer than anticipated, with some stocks potentially accelerating in the short term while others may take years.
• There's always a chance that value stocks might not perform as expected, which could impact your investment portfolio negatively.

List of top 10 best-performing value funds.

* Schemes are ranked according to their 3-year returns. Data as of February 28, 2024.

Consider this before investing in value mutual funds

When contemplating investments in value mutual funds, important factors include:

• Evaluating the fund's historical performance, ideally over 5 to 7 years, to understand how the fund manager has navigated through different market cycles while adhering to the value investing strategy.
• Recognising that value funds are more suited for those with a long-term investment outlook, and maintaining commitment to this horizon can lead to significant gains.
• Considering the expense ratio, which reflects the management fee for your investment. Frequent portfolio adjustments may incur higher transaction costs, making it an important factor in your investment decision.
• Acknowledging that all mutual fund investments are subject to market risks, including value funds. Assessing how the fund manager adapts the asset allocation in response to market dynamics is crucial.

Disclaimer: The article is for informational purposes only and not investment advice.