scorecardresearchValue funds tend to perform well when markets stay volatile

Value funds tend to perform well when markets stay volatile

Updated: 14 Mar 2022, 08:39 AM IST
TL;DR.

Value funds invest in undervalued companies to wait for a long time until companies unlock their growth potential

Value funds do not deliver high returns during bullish market, but they are clear winners when markets witness high volatility.

Value funds do not deliver high returns during bullish market, but they are clear winners when markets witness high volatility.

During bull market, it is the growth mutual funds that do well and are more likely to outperform the benchmark indices, however, during volatile times — it is the value funds that tend to stay ahead of the curve, say experts. The reason is no brainer: value funds invest in stocks and sectors which have long-term growth potential and are available at attractive valuations.  

In the last few years, when markets were surging, growth funds continued to deliver better returns than value funds, but now, value funds have started delivering better returns.

The Value Research data shows that value funds outperformed large, mid cap and small funds in past few months. Value fund managers always look for companies which are below their intrinsic value. In the last one year, funds such as ICICI Prudential Value Discovery and SBI Contra Funds have posted returns in the range of 20 to 23 per cent.

“These funds invest predominantly in undervalued companies where the fund managers are willing to wait for a longer period till the time companies unlock their growth potential. Since these funds always follow the valuations-based approach, they tend to be less volatile as compared to growth funds,” says Harshad Chetawala, Co- founder, MyWealthGrowth.com.

Mr Chetanwala also says that these funds fail to deliver high returns during bullish market, but they are clear winners (by falling lower than their peers) when markets witness high volatility. 

“The churning in the portfolio could also be less because of their long-term holding period in portfolio stocks. These funds may underperform compared to growth funds in over-valued market conditions. At the same time they help in less capital erosion during a market correction,” he adds. 

 

Returns posted by value funds in past three years: An indicative list

Value funds  1-year return (%) 3-year return (%)  Benchmark
HDFC Capital Builder Value Fund 20.2815.7418.66
ICICI Prudential Value Discovery Fund30.57   22.34   31.61
L&T India Value Fund        24.56   19.67   18.67
Templeton India Value Fund  22.56   18.65   31.61
UTI Value Opportunities Fund 17.59   19.49   18.66

(Source: AMFI) *Direct returns as on Feb 28, 2022

 

So, we can see from the above table that value funds consistently post high returns. For instance, ICICI Prudential Value fund posted over 30 percent in past one year, while three-year returns were also high at 22.34 percent. Similarly, HDFC Capital builder Fund posted more than 20 percent in past one year, outperforming its benchmark. Its three-year return was also high i.e., over 15 percent, albeit lower than its benchmark.

Likewise, UTI Value Opportunities Fund posted 17.59 percent return in past one year ending on Feb 28, 2022, whereas its three-year return was even higher at 19.49 percent, ahead of the fund’s benchmark. 

So, the retail investors who want to weather the ongoing storm in financial markets could add value funds to their portfolio if they wish to maximise the returns, and to decelerate the decline in their portfolio value – if not to arrest it altogether.  

 

First Published: 14 Mar 2022, 08:39 AM IST