Table of Content:
What are Value Mutual Funds?
A value fund is an open-ended equity scheme which follows a value investment strategy. These funds invest in three types of stocks – currently underperforming stocks or stocks with low P/E (Price to Earnings) ratio or stocks of companies which belong to emerging sectors which have the potential of rapid growth in the near future.
There are also schemes which follow a contrarian investment strategy and invest against the ongoing marketing trends. These schemes bet their money on currently underperforming stocks assuming that these stocks will recover in the long term as and when the short-term concerns plaguing them are mitigated. As per SEBI classification, these mutual fund schemes are called Contra Funds.
However, for ease, we have clubbed value funds and contra funds in our below mentioned list of best value funds.
Features of Value Mutual Fund
- Value Funds work under an investment strategy where assets are placed in the stocks trading below their intrinsic value or the stocks of the companies which are undervalued in the market
- These funds function to generate wealth for the investors and amplify the economy which has suffered a fall in demand over a period of time
- Value Funds offer a diversified portfolio to the investors consisting growth-oriented stocks
- Since these funds focus on the stocks which are trading at a discount, they tend to have a lower downside than the overall market
- The investments are spread out and passed on to the sectors of the economy which are overlooked. This strategy, eventually, adds growth to the India story and boost market confidence of the underperforming stocks
Related Article: Best 5 Value Funds for 2020 | Advantages of Value Funds
Advantages of Value Funds
- Diversified portfolio ensures that a part of your portfolio will do well at all times. Value Funds add diversity to the portfolio with asset allocated in growth-oriented schemes
- Investments in Value Funds are spread out on the sectors of economy which are overlooked. This adds growth and market confidence of underperforming stocks
- Since Value funds do not invest in stocks which have high expectations associated with them, they are known to be less vulnerable. These funds, with value investing strategy, focus on cheaper stocks or the ones which are currently undervalued in the market
Who Should Invest in Value Funds?
- Individuals who are willing to invest in their country’s underdeveloped industry segment or in the stocks of emerging businesses having potential to grow in near future
- Investors with low risk appetite can invest in value funds
- These funds are suitable for investors who have preliminary knowledge of market trends and choose to take bets for higher returns
- These funds can underperform during a bull market phase when there is downfall in the value stocks. So, these are suitable for investors who are seeking steady returns any no unexpected gains
How to Pick the Best Value Funds for 2020?
In 2018, most of the value funds performed poorly and failed to beat their benchmarks in terms of returns. This implies that the investors of value funds must employ a proficient strategy to prevent losses and be very picky about the stocks in which they are investing. Here are a few factors which will help you pick the best value fund for 2020:
- Analysing the Past Performance and Risks
Under the quantitative criteria, it is best to analyse the past performance of a fund across various market phases. You should scrutinise the rolling returns and trailing returns over short-term and long-term durations- 1-year, 3-year, 5-year. To analyse the risk, various ratios such as Sharpe Ratio, Sortino Ratio and Standard Deviation over a period of time must be examined
But, one must realise that past performances cannot completely be indicative of the future performances. This implies that one should not entirely or excessively rely on past performances to pick the best value fund
- Performance across market cycles
Perform a critical comparison of the performance of schemes with their benchmark index, across bullish and bearish market phases to make sure that the fund you pick can perform consistently to give sustainable returns
- Portfolio Efficiency
Portfolio composition is an important factor which plays a vital role in the future performance of a fund. Before you choose a value fund, make sure that the portfolio is not highly concentrated because that might heighten the risk involved. An ideal portfolio is supposed to be well-diversified with up to 50% of the assets exposed to top 10 stocks. The concentration to a single sector must not exceed 35%
Do not forget considering the portfolio turnover ratios & expenses and avoid the funds with high churning. Excessive churning can result in high turnover cost
- Experience & Expertise of Fund Management
Fund managers are the driving force of a fund towards efficient performance. For a fund to perform well in the market, there is a need for a sound investment process and good risk management techniques. So, when you want to pick a worthy value fund, you must understand the expertise & professional experience of its management. A manager with decent working experience in the field of investments and portfolio management is a necessity
After that, see if the manager has managed enough funds (good experience) and whether his management has drawn good returns or not. Also, you need to check the efficiency of the fund house and ensure that most of the schemes from the fund house are successfully giving sustainable returns.
Also Read: Growth Vs Value Funds
List of 5 Best Value Mutual Funds
If you are willing to invest in Value Funds, here are some best investment options which you can consider:
| Fund Name | AUM (Crores) | 3 Year Returns | 5 Year Returns |
| Invesco India Contra Fund | Rs.4,596 | 14.42 | 11.50 |
| Tata Equity PE Fund | Rs.5,184 | 9.92 | 10.08 |
| ICICI Prudential Value Discovery Fund | Rs.14,912 | 6.53 | 5.94 |
| HDFC Capital Builder Value Fund | Rs.4,496 | 9.60 | 7.84 |
| Aditya Birla Sun Life Pure Value Fund | Rs.4,087 | 2.00 | 5.41 |
(Data as on 28th January 2020; Source- Value Research)
Taxation
- In case the units of mutual fund are redeemed or sold after 1 year from the date of investment, capital gains up to Rs.1 lakh are tax exempted. And, the gains more than Rs.1 lakh are taxed at 10%
- In case the units of mutual funds are redeemed or sold within 1 year of investment, the entire amount of gains are taxed at 15%
How to invest in Value Funds?
There are different methods through which one can invest in Value funds:
- Offline mode – Visiting the nearest branch office of the fund house and investing in the desired scheme. You must carry all the required documents such as Identity Proof, Address Proof, Cancelled Cheque, Passport size photos, PAN Card and KYC Documents handy. You can also invest offline through a broker. However, this would then be a regular fund and not a direct fund. Think of it like a charge brokerage which gets deducted from the total investment amount
- Online Portal – If you want a hassle free mode of investing with no commissions and brokerage, you can choose websites like Paisabazaar.com which allow the investors to compare more than 1,700 funds at one platform instead of visiting the website of each AMC and then searching for numerous funds. You can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment