As the financial markets are undergoing a lot of uncertainty, investors are concerned about the stable returns as much as they are about the future potential of these funds. This brings to focus the value funds which are available at cheap valuations and are likely to rise in the long run.
Ace investor Jeremy Grantham once said that “You don't get rewarded for taking risk, you get rewarded for buying cheap assets.”
Another proponent of value investing — Sir John Templeton — is often quoted to have said, “Buy stocks for less than they are worth and hold them as long as it takes for the market to appreciate how undervalued they are.”
Some wealth advisors say that value funds are a good option for the recent market correction opportunity.
Since the start of calendar year, the BSE PSU index that falls in the value category is up by around 3 per cent as on July 27, while the BSE Information Technology index that is typically a growth category, is lower by 25.9 per cent during the same period.
“We do recommend value funds because of the recent correction opportunity. Also, some companies have started seeing a turnaround. As a result, the capacity utilisation is reverting to the pre-COVID levels and the credit growth is also happening. Because of these two factors, the valuation of companies will increase and once that happens — the stock price will increase automatically,” said Sridharan Sundaram, founder and principal officer, Wealth Ladder Direct.
The value funds are seen to perform good in the long run. Some of the top performing value funds have given a return of 10-12 percent in the past five years. For instance, ICICI Prudential Value Discovery Fund has given 12.49 percent return and Nippon India Value Fund has fetched 11.85 percent return during the same period.
| Value Funds | 5-year returns (%) |
| ICICI Prudential Value Discovery Fund | 12.49 |
| Nippon India Value Fund | 11.85 |
| UTI Value Opportunities Fund | 11.88 |
| IDFC Sterling Value Fund | 11.37 |
(AMFI data; regular returns as on July 27)
However, it is essentially meant for investors who are not open to too much of volatility and cannot afford to take big risk.
According to the AMFI’s ((Association of Mutual Funds in India) June data, there are 22 schemes under the value fund category. Net inflow for the month of June stood at ₹847 crore and net assets under management (AUMs) as on June 30, 2022 amounted to ₹75,220 crore out of a total of ₹12.86 lakh crore worth equity-oriented schemes.
Value Funds: Details as on June 30, 2022
| Number of schemes | 22 |
| Inflow in June | ₹847 crore |
| Net AUM on June 30 | ₹75,220 crore |
Styles of value investing:
Value investing ensures safety of principal while aiming for higher risk adjusted returns. It was conceived by Benjamin Graham, where he focussed on buying stocks that are trading below their intrinsic value based on its assets, liabilities and discounted future cash flows.
To factor in uncertainties, he also factored in a margin of safety. So, the underlying thought is to buy companies that are cheap after applying a margin of safety discount to estimated intrinsic worth.
Conversely, growth style of investing does not have a margin of safety. The thrust is on the opportunity and scope for execution in growth style of investing. Herein, the future growth hinges on several things to happen as expected, when the returns can be huge, but when it doesn’t happen it can result in major losses.
How to keep value traps at bay
As investors follow value investing approach, they should avoid some key value traps. First and foremost, simply because a stock is sold cheaply does not mean it has value. Major decline from 52-week highs does not imply value in stocks. Very famously, Warren Buffett has said ‘price is what you pay, value is what you get’.
This means a stock could be cheap, but you could still be paying higher than its intrinsic value, particularly when the company’s business model is stunted.
Another thing investors should do is to avoid going with PEs and P/Bs. They should also evaluate the company’s cash flows and debt. Eventually, future earnings should be reflected in the form of cash and importantly — the company is supposed to have the liquidity to clear its debts.
Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.
