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Funda Samjho, Phir Funds Chuno: Value Fund
Value Funds Explained
“Stocks at discount today, in demand tomorrow” intends to explain the basic idea behind value investing.
A Value Fund seeks to invest in companies where the market price appears to be below the estimated intrinsic value. Investment decisions are based on a rigorous assessment of a company’s earnings, cash flows, balance-sheet strength and long-term prospects, rather than prevailing market sentiment alone.
The fund manager uses disciplined valuation and price-to-book or price-to-earnings ratios to assess whether a company’s current valuation is below its own long-term average, its industry’s long-term average or the benchmark’s long-term average.
The market may take time to reflect a company’s intrinsic value. Therefore, value investing requires professional management, price-conscious investing and a long-term investment horizon.
What is a Value Fund?
A Value Fund is an equity mutual fund that invests in companies whose market price appears to be below their intrinsic value. The fund holds these investments with the expectation that, over time, their market price may move closer to their intrinsic value.
As per SEBI's categorisation, a Value Fund is an open-ended equity scheme that follows a value investment strategy and invests a minimum of 80% of its assets in equity and equity-related instruments.
The Value Investment Approach
Focus on fundamentals
Investment decisions are based on a rigorous assessment of a company's earnings, cash flows, balance sheet strength and long-term prospects, rather than prevailing market sentiment.
Disciplined valuation
Metrics such as price-to-earnings and price-to-book ratios are used as a frame of reference to assess whether a company's current valuation is below its own long-term average, its industry's long-term average or the benchmark's long-term average.
A long-term horizon
The market may take time to reflect a company's intrinsic value. The approach is therefore designed for investors with a long-term investment horizon.
Key Benefits of Value Funds
Style diversification:
A Value Fund introduces a distinct investment style that can complement other equity strategies within a portfolio.
Professional management:
Estimating a company's intrinsic value requires in-depth research and analysis. This is undertaken by experienced fund managers in line with the fund's investment strategy.
Price-conscious investing:
Each investment decision is guided by a consistent principle: whether the price is supported by the underlying business.
How to Start your Mutual Fund Journey?
FAQs
A Value Fund is an open-ended equity mutual fund that invests in companies trading below their estimated intrinsic value. As per SEBI, it must invest a minimum of 80% of its assets in equity and equity-related instruments.
Intrinsic value is an estimate of a company's actual worth, based on its earnings, assets, cash flows and future prospects, independent of its prevailing market price.
The fund manager analyses a company's fundamentals, such as earnings, cash flows and balance sheet strength, to estimate its intrinsic value. Valuation indicators such as price-to-earnings and price-to-book ratios are used as a frame of reference to assess whether a company's current valuation is below its own long-term average, its industry's long-term average or the benchmark's long-term average. The fund invests when the market price appears to be below the estimated intrinsic value. Investments are generally held over the long term, until the market price reflects the estimated intrinsic value.
Yes. The Value Fund category does not impose a mandatory large-cap, mid-cap or small-cap allocation. It can invest across market capitalisations, provided:
- at least 80% of total assets is invested in equity and equity-related instruments;
- the portfolio follows the disclosed value investment strategy; and
- the Scheme Information Document does not impose a narrower investment universe.
A horizon of 5 years or more is generally recommended. The market may take time to recognise a company's intrinsic value, and a longer horizon also helps mitigate the impact of short-term volatility. Investors are advised to consult their financial advisor.
Value Funds may be suitable for first-time investors who view them as a long-term equity investment. While the fund is professionally managed and diversified, it is subject to market risk and requires a long-term commitment.
Yes. A Systematic Investment Plan (SIP) allows investors to invest a fixed amount at regular intervals, such as weekly or monthly. It encourages investment discipline and helps average the cost of investment across different market levels.
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