What is a Value Fund?
A Value Fund is an open-ended equity scheme that follows a value investment strategy. Value Funds have the “flexibility” to take exposure across market capitalization.
Value Investing is a long-term investment strategy that focuses primarily on the true value of a business as it invests in stocks where the current market price is lower than the stock's intrinsic value. A simple way to understand this is that it is like ‘buying at a discount’.
How does a Value Fund work?
Value Funds primarily invest in companies that are traded less than their intrinsic value and take exposure across market capitalization with a benchmark agnostic approach. It primarily focuses on factors such as:
- Intrinsic Value:
This represents the actual value of businesses in the market.
- Margin of Safety:
Margin of safety is achieved when securities are purchased at prices sufficiently below the underlying value.
E.g. A company with an Intrinsic value of ₹100 is considered to have a good buffer when you buy it at a Price of ₹50. This gives a margin of safety equivalent to 50%.
Why invest in a Value Fund?
Active Portfolio Management
Fund managers have expertise in the industry and are capable of efficiently managing the Value Fund. Selection and allocation to various sectors across market caps is professionally managed.
Diversification of Risk
A mixture of Value Funds and Growth Funds in an investment portfolio could be a good strategy to balance the portfolio and diversify the risk.
Better Defense Opportunity during Market Downturn
Growth stocks may be expensive owing to the high valuations due to which there is a possibility that they could be volatile during periods of market fluctuations. However, in value stocks the margin of safety is accounted for and these stocks are relatively low-priced. Thus, the downside of the portfolio can be managed during market corrections.
Here are some FAQs about Value Funds
- Value Fund takes a flexible approach while taking exposure across large-cap, mid-cap as well as small-cap businesses. Therefore, it allows investors to diversify across market capitalization and provide long-term wealth creation opportunities.