What are Value Mutual Funds?
A value fund is an open-ended equity scheme which follows a value investment strategy. These funds invest in three types of stocks – currently underperforming stocks or stocks with low P/E (Price to Earnings) ratio or stocks of companies which belong to emerging sectors which have the potential of rapid growth in the near future.
There are also schemes which follow a contrarian investment strategy and invest against the ongoing marketing trends. These schemes bet their money on currently underperforming stocks assuming that these stocks will recover in the long term as and when the short-term concerns plaguing them are mitigated. As per SEBI classification, these mutual fund schemes are called Contra Funds.
However, for ease, we have clubbed value funds and contra funds in our below mentioned list of best value funds.
List of 10 Best Value Mutual Funds
Given below is a list of best value funds for year 2020-21-
|Fund Name||AUM (Crs.)||3-Year Returns (%)||5-Year Returns (%)|
|Invesco India Contra Fund||Rs. 4,596||15.24||12.34|
|Kotak India EQ Contra Fund||Rs. 882||16.69||11.31|
|L&T India Value Fund||Rs. 7,759||9.55||10.74|
|Tata Equity PE Fund||Rs. 5,184||11.55||10.72|
|HDFC Capital Builder Value Fund||Rs. 4,496||10.70||8.82|
|Nippon India Value Fund||Rs. 3,133||12.33||8.75|
|IDFC Sterling Value Fund||Rs. 3,132||10.39||7.31|
|Quantum Long Term Equity Value Fund||Rs. 904||6.30||7.15|
|UTI Value Opportunities Fund||Rs. 4,560||12.25||6.86|
|ICICI Pru Value Discovery Fund||Rs. 14,912||7.02||6.74|
(Data as on 16th January 2020; Source- Value Research)
Features of Value Mutual Fund
- Value Funds work under an investment strategy where assets are placed in the stocks trading below their intrinsic value or the stocks of the companies which are undervalued in the market
- These funds function to generate wealth for the investors and amplify the economy which has suffered a fall in demand over a period of time
- Value Funds offer a diversified portfolio to the investors consisting growth-oriented stocks
- Since these funds focus on the stocks which are trading at a discount, they tend to have a lower downside than the overall market
- The investments are spread out and passed on to the sectors of the economy which are overlooked. This strategy, eventually, adds growth to the India story and boost market confidence of the underperforming stocks
Who Should Invest in Value Funds?
- Individuals who are willing to invest in their country’s underdeveloped industry segment or in the stocks of emerging businesses having potential to grow in near future
- Investors with low risk appetite can invest in value funds
- These funds are suitable for investors who have preliminary knowledge of market trends and choose to take bets for higher returns
- These funds can underperform during a bull market phase when there is downfall in the value stocks. So, these are suitable for investors who are seeking steady returns any no unexpected gains
How to Pick the Best Value Funds for 2020?
In 2018, most of the value funds performed poorly and failed to beat their benchmarks in terms of returns. This implies that the investors of value funds must employ a proficient strategy to prevent losses and be very picky about the stocks in which they are investing. Here are a few factors which will help you pick the best value fund for 2020:
- Analysing the Past Performance and Risks
Under the quantitative criteria, it is best to analyse the past performance of a fund across various market phases. You should scrutinise the rolling returns and trailing returns over short-term and long-term durations- 1-year, 3-year, 5-year. To analyse the risk, various ratios such as Sharpe Ratio, Sortino Ratio and Standard Deviation over a period of time must be examined.
But, one must realise that past performances cannot completely be indicative of the future performances. This implies that one should not entirely or excessively rely on past performances to pick the best value fund.
- Performance across market cycles
Perform a critical comparison of the performance of schemes with their benchmark index, across bullish and bearish market phases to make sure that the fund you pick can perform consistently to give sustainable returns.
- Portfolio Efficiency
Portfolio composition is an important factor which plays a vital role in the future performance of a fund. Before you choose a value fund, make sure that the portfolio is not highly concentrated because that might heighten the risk involved. An ideal portfolio is supposed to be well-diversified with up to 50% of the assets exposed to top 10 stocks. The concentration to a single sector must not exceed 35%.
Do not forget considering the portfolio turnover ratios & expenses and avoid the funds with high churning. Excessive churning can result in high turnover cost.
- Experience & Expertise of Fund Management
Fund managers are the driving force of a fund towards efficient performance. For a fund to perform well in the market, there is a need for a sound investment process and good risk management techniques. So, when you want to pick a worthy value fund, you must understand the expertise & professional experience of its management. A manager with decent working experience in the field of investments and portfolio management is a necessity.
After that, see if the manager has managed enough funds (good experience) and whether his management has drawn good returns or not. Also, you need to check the efficiency of the fund house and ensure that most of the schemes from the fund house are successfully giving sustainable returns.
- In case the units of mutual fund are redeemed or sold after 1 year from the date of investment, capital gains up to Rs.1 lakh are tax exempted. And, the gains more than Rs.1 lakh are taxed at 10%
- In case the units of mutual funds are redeemed or sold within 1 year of investment, the entire amount of gains are taxed at 15%
Frequently Asked Questions
Q.1: What is value and contra fund?
Ans: Value Mutual Funds indulge in a value investing strategy referring to investments made into the stocks/shares which are undervalued in the market. On the other hand, Contra funds make investments in the sectors and stocks which are not doing well by purchasing the assets which are depressed at that point of time.
Q.2: What are growth funds?
Ans: Working with the sole objective of capital appreciations, Growth Funds are the funds which invest in the stocks of emerging companies that are expected to grow at a faster pace in the market. Growth funds give little or no dividend to the investors.
Q.3: What is the difference between value and growth funds?
Ans: Value funds invest in the stocks/shares which are undervalued in the market but have a higher dividend yield. Growth Funds aim at capital appreciation and usually do not give dividend payments. The returns, in Growth funds, are realised through the appreciation in price. But, in value funds, the returns are a combination of price appreciation and dividend yield.
Q.4: What is a Blue Chip Fund?
Ans: Blue Chip fund is a type of Mutual Fund which invests in the stocks/shares of well-established and financially sound companies having a credible track record with regular dividend payouts.