Why You Should Not Ignore Worthy ‘Value Funds’ Now
Sep 05, 2019

Author: Rounaq Neroy

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(Image source: freepik.com)

In the stock market or equity investing, it is very common for investors to look at the 'price' instead of the 'value' the stock commands.

The fact is, it's important to pay the right price for the right stocks. This is precisely what the famous quote: "Price Is What You Pay, Value Is What You Get", by the legendary investor Warren Buffett, popularly called "Oracle of Omaha", conveys.

The Value Investing approach looks to pick undervalued stocks, i.e. the stocks' current market price is lower than its intrinsic value, but with strong fundamentals.

Value Investing is digging deep to understand the valuation parameters viz. Price-to-Book value (P/B), Price-to-Earnings (P/E), Price-to-Sales, and Dividend Yield, among many other quantitative parameters to evaluate the intrinsic value of the business before buying it.

In addition, Value Investing also goes beyond pure valuations (i.e. the quantitative parameters). It pays attention to even the qualitative ones viz. the prospects of the industry, the business of the company, its business model, the management quality, and of course the broader macroeconomic environment that weighs on the company's business. In turn, how all of these aspects augur in the journey of wealth creation for investors is assessed. So, in a way, value investing also finds its place in the profound quote: "Beauty lies in the eyes of the beholder", by the Greek philosopher Plato.

Thus, the emphasis is always on underlying fundamentals and true value rather than the underlying market sentiments. It is based on the understanding that in the near term, the equity markets have little to do with fundamentals and are subject to irrational and excessive price fluctuations due to the ingrained tendency of most people to 'trade', rather than 'invest'.

Hence, the father of value investing, Mr Benjamin Graham, has said, "In the short run, the market is a voting machine, but in the long run it is a weighing machine."

Value Funds
(Image source: freepik.com)


Is it an opportune time to invest in a Value Fund?

Currently, although the Indian equity market has hit turbulence and wealth creation could be a challenge in 2019, the concept of 'Value Investing' is expected to reap rewards in the long run. This is because the present conditions provide a good opportunity to do value hunting.

For investors, therefore, this makes a fair case to have exposure to a 'Value Fund'.

A 'Value Fund' as categorised by the capital market regulator, SEBI, follows a defined style of investing, namely 'value' and it is expected to maintain minimum 65% investment in equity & equity related instruments.

Thus, a fund manager of a Value Fund is expected to practice 'Value Investing' principles and strategies for the portfolio construction activity. Usually, a Value Fund manager adopts a bottom-up approach to stock picking while investing across market capitalisation, i.e., large-cap, mid-cap, and small-cap stocks, and sectors.

Graph: How are Value Funds placed on the risk-return spectrum?


Note: The chart above is for illustrative purpose only
(Source: PersonalFN Research)


On the risk-return spectrum, Value Funds are placed relatively high - between Focused Funds and Dividend Yield Funds. Hence, value funds aren't for the faint-hearted. Only if you are an aggressive investor, willing to take moderate-to-high risk, and have an investment time horizon of at least 5 years, you may consider owning a Value Fund in your core portfolio.

That being said, this is an opportune time to add (or hold on to) a worthy 'Value Fund' in your portfolio.

Although the mainstream media is displaying a picture of gloom amidst the economic slowdown, global uncertainties, and geopolitical tensions presently, India looks to be an attractive investment destination over the long-term. India has set a goal of making India a USD 5-trillion economy by 2024-25 and has even unveiled a blueprint in its latest economic survey for 2018-19. The reforms are expected to continue, and very recently the government has announced certain structural long-term measures to reinvigorate economic growth. The RBI is accommodative in its monetary policy stance to address growth concerns. All these measures, in effect, in the long run, are likely to yield fruitful results.

Watch this video: Will Value Investing Play Out in 2019 and the Challenges Ahead


​The market valuations, at present, offer a decent margin of safety across market capitalisation segments, particularly in the mid-and-small-cap space. Besides, some companies are off their 2017 highs offering a 'value opportunity' to discover companies with robust fundamentals at cheaper valuations. And in turn, if their conviction and assessment of these companies go right, it can generate wealth for investors in the long run. Thus, there is a good opportunity to multiply investment returns if you select and invest in a worthy Value Fund/s now.

How to identify a worthy value fund?

Managing a Value Fund is no cakewalk. It requires the fund house to have a deeper understanding to ascertain whether the investment will be truly valuable or a dud in the long run. It also requires, at times, the courage to go against the market and take bold calls.

Hence, to select a value fund, assess the following:

  • Whether it adheres to the guiding principles of 'Value Investing' for its portfolio construction activity.

  • Does it follow a bottom-up approach to stock-picking, wherein in the company's fundamentals and competitiveness, business model, management quality is deeply evaluated; and then the sector, the prospects of the industry it operates in, and last the overall macroeconomic environment. The entire approach should entail identifying companies that have a good management team, good product line, high growth potential, and cheaper valuations compared to its peers.

  • The fund manager should hold each stock with conviction and not churn the portfolio too often. Ideally, a fund manager should be following a buy-and-hold investment strategy to derive the full potential of the stocks in the portfolio and maintain a low portfolio turnover ratio.

  • How responsive is the fund manager to the developments that affect the companies he/she holds in the portfolio, and the efficient use of cash to safeguard the portfolio?

  • And the expense ratio of a Value Fund should be one of the least in its category.

In addition, investors should also pay emphasis to a host of quantitative and qualitative parameters viz. returns (across time periods and market cycles), the risk the fund has exposed its investors to, the portfolio characteristics, the fund manager's experience, the number of schemes he/she manages, among many other fine aspects.

You see, it is important to choose a Value Fund that has consistently performed and comes from a mutual fund house that follows a robust investment process & systems with effective risk management strategies in place.

Here are a few mistakes you should clearly avoid when you pick a value fund/s:

  • Giving undue importance to returns generated by a scheme only during bullish phases

  • Depending extensively on the past track-record of a scheme

  • Not considering the track record of the scheme in handling downside risks

  • Giving importance to the short-term market outlook

  • Relying blindly on star-ratings, which may be inconsistent

  • Disregarding qualitative aspects associated with mutual fund selection

  • Relying on the advice given by friends and relatives who are unqualified to give you advice on mutual funds

  • Ignoring your personalised asset allocation

If you systematically invest in a Value Fund, it can help you accomplish the long-term financial goals such as buying a dream home, your child's higher education needs, their wedding expenses, and even your own retirement.

But before you go ahead and add a Value Fund in your core portfolio, do take note of the following points:

  • Make sure you have the stomach for moderate-to-high risk;

  • Recognize what is your investment objective and if it's in sync with that of the fund;

  • Consider your financial goals before investing;

  • Set realistic return expectations; and

  • Have an investment time horizon of at least 5-7 years

Given the current volatility in the Indian equity market, to mitigate the risk involved, consider taking the SIP (Systematic Investment Plan) route as opposed to a lump sum investment, while you endeavour to compound your wealth leaps and bounds.

Quantum Long Term Equity Value Fund (QLTEVF) is a worthy Value Fund that truly follows a 'Value Investing approach while focusing on long-term growth. By focussing on stocks that are trading at a discount to their intrinsic value, this value-oriented scheme has lived up to its name, picking undervalued stocks (across market capitalisations and sectors) that have the potential to deliver supernormal returns over long-term. This makes QLTEVF a prominent contender for long-term investors looking for a relatively stable fund that can add true value-style flavour in their portfolio.

That said, consult your investment adviser to assess if the Fund is suitable for you.

Want to learn more on value investing?

PersonalFN's Guide to Value Investing with Mutual Funds

Download PersonalFN's Guide to Value Investing with Mutual Funds

In this issue you will learn:

  • 4 Steps To Value Investing

  • 5 Reasons to Invest in a Value Fund

  • What are Value Funds

  • Tax implication of investing in a Value Fund

  • ...and much more!

Click here download this valuable guide for FREE!

Happy Investing!

This article first appeared on Certified Financial Guardian.  



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