Q. I am a psychologist with a stable income, my wife is also working, she is a professor. We have been investing in government schemes but now wish to diversify to mutual funds. We find the current stock market highly overpriced and do not wish to invest in large cap stocks at present. Can you please tell us about value mutual funds, we understand that they identify undervalued stocks with sound financials and invest in them, please tell us about their expense ratio, taxation, lock-in and other features.
Mukul Patidar, Kutch, Gujarat
Finding the equities market's "hidden gems" is the essence of value investing strategy. Investors frequently ignore the fundamentals of a company and just invest in a company basis its current stock price.
Value funds are equity-oriented mutual funds that adhere to SEBI regulations and use the value investment strategy, investing at least 65% of their assets in stocks and other equity-related instruments while maintaining the option to invest across market capitalizations.
Value investing strategy is about buying the right stocks at the right price. Value funds specifically aim to achieve this. These funds seek to invest in undervalued stocks, which have sound fundamentals and significant room for growth but whose present market price is below their intrinsic or fair value. Let us understand this with an illustration:
The intrinsic value of a stock is different from market-based market value. There are instances where the state of the market causes stocks to be undervalued. Value investors and Value Mutual Funds search for these discounted stocks and invest in them since they come from high-value companies. If a stock has an inherent worth of Rs. 200 and is currently trading at Rs. 100, the remaining Rs. 100 gives value investors the assurance that they will benefit significantly more than people who are not following the value investment strategy.
Benefits of value mutual funds
- Value investing gives you access to a diversified portfolio where the majority of the assets are allocated to growth mutual fund schemes.
- Value funds are typically less vulnerable to market fluctuation because their investment approach concentrates on undervalued stocks.
- Value fund corpus is spread throughout all ignored economic sectors. There is typically no over-concentration in one sector.
- Value mutual funds follow value investing and choose stocks that are traded below their true value and produce gains without considering the market efficiency. Many investors, including the world's most renowned investment guru Warren Buffett, favour value investing over other investment strategies.
- Mob mentality: A value investor stands out from the crowd in part because they never buy stocks in which the majority of other investors are also interested. The reason Warren Buffet is one of the most successful investors who has amassed a sizable fortune is because he does not adhere to the mob mentality.
Please see below the key characteristics of value mutual funds
Eligibility
- Any Indian citizen can invest in value mutual funds.
- NRIs can invest in value mutual funds too.
- Children below 18 can also invest in value mutual funds.
Returns
In case of value mutual funds, returns are not guaranteed, and investments in mutual funds including value mutual funds, are subject to market risk. Top 5 debt mutual funds have historically provided a CAGR of above 12% (per year) in the past 5 years (as on 7 September, 2022).
Fee
Value Mutual Funds schemes are managed by asset management companies, which manage your investment in the mutual fund scheme professionally. Asset management companies charge a certain amount (expense ratio) every year to the investor for managing their investment.
Lock-In
In the case of value mutual funds, typically you can redeem your investment at any time, the majority of the value mutual funds do not have any kind of lock-in period.
Taxation
Value Mutual Fund is classified as an equity mutual fund and is taxed accordingly. Short-term capital gains, i.e., gains made from selling units of the mutual fund within one year of purchase in the case of value mutual funds are taxed at the rate of 15 percent. Long-term capital gains, i.e., gains made from selling units of the mutual fund after one year of purchase in the case of value mutual funds are taxed at the rate of 10 percent.
Unlike ELSS Mutual Funds, investment in Value Mutual Funds is not tax-exempt under Section 80 C of the Income Tax Act, 1961.
Investment Threshold
Typically, most Value Mutual Funds have a minimum investment threshold of INR 500, there is no upper investment limit in the case of Value Mutual Funds.
How can one invest
One can invest in Value Mutual Funds through a number of different methods:
- Through zero commission mutual fund investment platforms such as Kuvera.
- Through a broker/commission agent, in this case, the investor will be buying the regular scheme of the Value Mutual Fund which has a higher expense ratio than the direct scheme of the same mutual fund.
- Through the website of the Asset Management Company.
Conclusion
The stock market has been fluctuating throughout this year, recently in the month of September the stock market has touched new heights. Many investors fear that most of the companies are overvalued and there is a stock market bubble forming, investing at this stage may lead to a loss for them in the near future.
Value mutual funds are a panacea for investors who are looking to invest in companies at a reasonable valuation from a long-term perspective. Value investing focuses on finding companies with strong fundamentals that are not overpriced, the success of Warren Buffet and Berkshire Hathaway is a testament to the strength of value investing strategy.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
Kuvera is a free direct mutual fund investing platform.
