What thrills you when an e-commerce website offers you a huge discount -- saving a few bucks, right?

Or is there something more?

Perhaps, it’s the feeling of getting more value for less money, isn’t it?

You might get stuff cheap, but would it be worth buying if it’s inferior in quality or nearing its expiry – that’s what you need to look into.

Fortunately, there’s no expiry to stock markets. Yet, they offer you discounts ever so often.

When stocks fall, the important point is to know if ‘value’ is still intact. Legendary investor, Warren Buffett has famously said, “Price is what you pay. Value is what you get.”

Some mutual fund schemes prefer to ignore the discount element (in terms of falling stock prices) and rather focus on buying something inexpensive that still holds the same value. Such funds are popularly known as value funds.

(Image source: flickr.com)

The value can come from low valuations, higher asset base, and the line of business or the business model of the company. Unless otherwise stated to the contrary, value funds are usually sector and market cap agnostic. Meaning, they don’t have any bias for/against any sector or the size of the company.

 [Read:  What Is Value Investing And Why Invest In Value Funds]

Does it make sense to invest in value funds under the current market scenario?

Right now, the broader markets are down around 10%, and many stocks have fallen much more than the broader markets.

However, there are many challenges or headwinds which the Indian economy is currently facing —depreciating Indian rupee, Current Account Deficit (CAD) widening, possible slippages to fiscal deficit targets set by the government, risk to the inflation trajectory (as cited by the RBI), liquidity crunch, slowdown in consumption, and deceleration in core sector growth, among many other factors.

The aforesaid factors have negatively affected the profitability of many companies, and hence, are negative for the capital markets.  Moreover, as we are nearing elections, the volatility is likely to rise further.

On the other hand, the global economy is also ploughing through difficult times. Trade war tensions, Brexit transition, and the Federal Reserve is slowly normalizing interest rates in the US, which could weigh on global growth in the foreseeable future.

Nevertheless, under such market conditions, there is a chance for mutual fund managers to find some good bargains.

You’ve probably heard the experts talk about rich valuations of Indian equities. In the absence of impressive corporate earnings growth, rich valuations might look imperceptive. Due to which, the stocks enjoying pricy valuations might suffer, but those with attractive valuations might hold firm.  

So, investing in value funds could pay off.

But don’t jump to buy a value fund straight away.

Let’s track their performance across time frames.

At present, there are 12 value funds on offer; of which, only three have outperformed the Nifty 500 Total Return Index (TRI) on Year-To-Date (YTD) basis.

On a 1-year and 2-year timeframe, again, only three schemes outperformed the Nifty 500-TRI.  When compared to returns generated over the last 3 years, the scheme count of outperformers improved to 5.

Nonetheless, as many as 9 of 12 schemes did outsmart the Nifty 500-TRI on the 5-year performance parameter. They are:

Aditya Birla SL Pure Value Fund(G)-Direct Plan

HDFC Capital Builder Value Fund(G)-Direct Plan

ICICI Pru Value Discovery Fund(G)-Direct Plan

IDFC Sterling Value Fund(G)-Direct Plan

JM Value Fund(G)-Direct Plan

L&T India Value Fund(G)-Direct Plan

Reliance Value Fund(G)-Direct Plan

Tata Equity P/E Fund(G)-Direct Plan

Templeton India Value Fund(G)-Direct Plan

Do note that value funds can underperform in the markets over a shorter duration because they tend to buy out-of-favour stocks (available at bargain prices). And beaten-down stocks can take longer than expected to recover.

Thus, you should refrain from investing in any value fund blindly with the hope that it will create value for you.

Please remember, the worst performing value fund has posted a loss close to -24% on YTD basis and another 6 out of 12 funds have generated double-digit negative returns.

The reasons for such a high prevalence of underperformance are multiple, which include lack of earnings growth, the lack of near-term visibility in earnings, to name a few. At some point, if the valuations of such companies start looking dirt-cheap and post even the mildest recovery in earnings, these stocks will start to attract investors’ attention. Until then, be prepared to experience a rollercoaster ride.

Before you invest in value funds do remember this:

• Don’t invest in them unless your time horizon is five years and above.
   
• Invest in value funds only if you have a high-risk appetite because they can be highly volatile sometimes.
   
• You should consider your financial goals before investing
   

If you decide to invest in value funds, prefer direct plans and invest through Systematic Investment Plans (SIPs), as that can help you mitigate the volatility (with rupee-cost averaging) and power your investments with the benefit of compounding.

How to select the right value fund for your portfolio?

Look at their performance track record over various time frames and market phases.

You must consider the risk-return ratios. Besides this, consider the various qualitative factors such as fund manager’s experience, portfolio characteristics, and the fund house’s investment philosophy, among a host of other parameters.

It’s quite possible that a fund might classify itself as a value fund, but might invest a considerable chunk of its portfolio in growth companies. You need to be wary of such schemes.

The Securities and Exchange Board of India (SEBI) hasn’t specifically defined what classifies as a value stock, unlike for other equity mutual funds that follow a particular market capitalisation bias.

Watch this video to get expert guidance on selecting the right mutual fund scheme

[Read: Which Equity Mutual Funds To Buy Now?]

Editor’s note:

Are you wondering who will help you select a worthy value fund for your portfolio?

PersonalFN's unbiased premium research service—FundSelect. It is the right choice for you.

With FundSelect, you get access to highly credible and reliable funds picked by our research team using a comprehensive S.M.A.R.T. score fund selection matrix.

S – Systems and Processes

M – Market Cycle Performance

A - Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

Every month, PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes – the ones to buy, hold, or sell. The aim is to assist you in creating the ultimate portfolio that has the potential to top the market.

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