Value Funds: Do you have patience for this?
The US presidential election, eternal wait for stimulus as well as the second wave of the global pandemic is making the equity market nervous at a higher level. When you face such situations, history should guide you and it suggests that value investing has worked in these uncertain times. This is especially true as the value style has underperformed the growth style for a decade now.
The value investor works like a shrewd buyer, who makes most of the end of season sale when they come out with their wish list and go on a shopping spree. Chances are high that they would get quality products at a lower price.
In the world of investing, the fund manager of an equity value fund build portfolio of stocks is available at cheaper valuations. The lower price may be due to various reasons. It may be a case where the true market value of a stock is widely miscalculated or not realised by the market and hence, its share price is trading below its intrinsic value. However, as and when the market realises its potential, it will be re-rated and the stock’s price will move up and hence, can reap huge benefits to its investors.
Value investment is actually what you are paying for today rather than speculating over what you could possibly get in the future. And value lies in something available currently at a discounted or at a price lower than its actual worth.
Value Fund as defined by the market regulator
After the rationalisation and categorisation of the funds done by SEBI in the year 2017, a fund house can offer either a value fund or a contra fund. They cannot offer both types of funds. According to the circular, the scheme should follow a value investment strategy. The minimum investment in equity & equity-related instruments amounts to 65 per cent of the total assets.
Long-term returns of various categories of funds
The table below clearly shows that as the number of years increases, the performance of the value-oriented funds also increases. Therefore, if you want better returns, you need to be quite patient.
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Fund Category Returns
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Category
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1 year
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3 years
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5 years
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10 years
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Large-Cap
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-1.06
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3.89
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8.18
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7.58
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Large & Mid-Cap
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0.43
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0.54
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7.84
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9.27
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Multi-Cap
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-0.14
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1.58
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7.59
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8.35
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Mid-Cap
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6.47
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0.22
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7.62
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11.06
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Small-Cap
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9.21
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-3.26
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6.93
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9.91
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Value-Oriented
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-0.35
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-1.7
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6.31
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8.59
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Value Fund is suited for
Hence, value funds suit those investors, who have a lower risk appetite rather than someone who prefers to have steady returns.