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Financial Term of the week- Value Funds

Value investing is all about finding a deal. Yes, you read it right. Mutual funds may also come with deals. Value investing is when you spot an opportunity and invest in it at a discount knowing/assuming that the actual worth is higher. The aim here is to benefit from this gap of worth and in the process, earn returns. The mutual funds that invest using this strategy are called value mutual fund schemes.

How do value funds work?

There are many factors that can lead to a stock being undervalued or overvalued in the market. Some examples of these factors are dwindling markets and speculations, investor sentiments, rumours about companies, and many more. All this causes certain stocks to trade at a discount, i.e. lower than their intrinsic value. Value funds identify such stocks and invest in them. This requires the fund managers to carefully evaluate the fundamentals and reports of these companies they aim to invest in. Because, after all, there is always a risk of these undervalued stocks not recovering to their intrinsic value. Thus, the value fund managers carefully identify the current and future plans of these companies.
It is ideally a long-term investment strategy, because for an undervalued stock to reach its intrinsic value, it may take a considerable amount of time.

Key Highlights of Value Funds-

  • Investing in companies whose shares are undervalued in the market
  • Generally, having the potential to perform well early in economic recovery
  • If you are investing in a value fund, you may want to look at a diversified one so that you hedge your risks
  • You may need some patience as it is considered to be a long-term strategy
  • Since value funds invest in undervalued stocks, they may be less vulnerable to market fluctuations
  • Not every value opportunity is worth investing in. You may need to understand the background and financials of the companies the fund is investing in, to make a decision

In conclusion-

The thing to consider about value funds is that finding the discount is only the first step. A good value fund is characterized by the value-to-worth journeys that it chases. Value funds are typically without any biases for industries or capitalization. When choosing a value fund to invest in, it is advisable to study the strategy and the companies it invests in diligently.


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Disclaimer:
This is an investor education and awareness initiative by Nippon India Mutual Fund.
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

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