DIVYA GROVER JAN 02, 2024 / READING TIME: APPROX. 18 MINS
Value Mutual Fund is a sub-category of equity mutual funds that offers investors the opportunity to benefit from the growth potential of the undiscovered gems of the equity market. Value Mutual Funds look to identify stocks that are trading below their intrinsic/fair value but have strong fundamentals and hold them until their full value/potential is realised.
In this article, find out the 3 best Value Mutual Funds for 2024. Before we move on to the list, let us first get to know about the category in detail.
What are Value Funds?
SEBI defines Value Funds as equity-oriented mutual funds that follow the value-investment strategy, investing a minimum of 65% of its assets in equity and equity-related instruments. These funds have the flexibility to invest across market capitalisation and sectors.
The value-investment strategy aims to identify the hidden potential of undervalued stocks. A stock could be undervalued because a large number of investors may not have discovered it yet, or there could be a misperception about the company due to recent events. However, if the company is fundamentally strong, it is likely to overcome any hurdles over time. Consequently, over a period, its stock price will begin to reflect its actual worth.
It is important to note that not every stock that is trading at a significant discount to its historical average is considered a 'value buy'; some of these stocks can turn out to be 'value traps'. It is vital to discover the true worth of a stock (rather than chasing it merely because it is available cheap).
Thus, for the portfolio construction activity, the fund manager of a Value Fund usually follows a bottom-up approach to stock-picking.
They use various valuation metrics such as P/E ratio, P/B ratio, EBIT, EBITDA, cash flows, etc., along with profitability ratios such as ROCE, ROE, and ROA, among others, to judge the future potential of the stocks. The fund managers also analyse a host of qualitative aspects of the company, such as its economic moat, circle of competence, economies of scale, the market in which it operates, brand value, management quality, corporate governance and culture, amongst a host of other factors.
Examples of Value Mutual Funds in India
| Scheme Name |
AUM (Rs Crore) |
| ICICI Pru Value Discovery Fund |
35,089 |
| HSBC Value Fund |
10,129 |
| UTI Value Fund |
7,978 |
| Bandhan Sterling Value Fund |
7,214 |
| Tata Equity P/E Fund |
6,477 |
| Nippon India Value Fund |
6,193 |
| HDFC Capital Builder Value Fund |
6,075 |
| Aditya Birla SL Pure Value Fund |
5,151 |
| Baroda BNP Paribas Value Fund |
1,581 |
| Templeton India Value Fund |
1,524 |
| Canara Rob Value Fund |
999 |
| Quantum Long Term Equity Value Fund |
956 |
| Quant Value Fund |
886 |
| DSP Value Fund |
705 |
| Axis Value Fund |
386 |
| JM Value Fund |
340 |
| Union Value Discovery Fund |
187 |
| ITI Value Fund |
146 |
| LIC MF Long Term Value Fund |
98 |
| Groww Value Fund |
12 |
The securities quoted are for illustration only and are not recommendatory.
AUM data as of November 30, 2023
(Source: ACE MF, data collated by PersonalFN)
Growth vs Value Fund: Which is better?
Growth-oriented mutual funds look to identify companies that have the potential to grow at a faster pace compared to their peers in terms of revenue, profitability, market share, etc. The stocks of such companies may continue to soar even if they are expensively valued as people are willing to pay higher prices for such stocks in anticipation of significant earnings growth. Therefore, P/E, P/B ratios of such companies can be higher than the industry average.
As the growth rate is higher, they tend to outperform the benchmark during a secular bull run and in times of economic growth. However, such stocks are more volatile because any positive or negative news (global or national events) can significantly affect their prices.
In contrast, value-oriented mutual funds look to pick undervalued stocks, i.e. the stocks' current market price is lower than its intrinsic/fair value, with strong fundamentals. Factors such as economic downturns, market volatility, or any short-term negative news surrounding the company can result in a lower valuation of a particular stock. But once the outlook improves, value stocks can reward investors with remarkable gains.
Such fundamentally strong companies are less volatile and enjoy a better margin of safety as compared to growth stocks.
Both approaches have their advantages, but it is important to note that a stock cannot remain a growth or value pick forever. A growth stock will cease to be a growth stock when the growth reaches its optimum or if it fails to grow to its potential. Similarly, a value stock will not remain so once its value has been realised or if its value is not likely to appreciate any further.
Favourite stocks of Value Mutual Funds
The securities quoted are for illustration only and are not recommendatory.
AUM data as of November 30, 2023
(Source: ACE MF, data collated by PersonalFN)
As an investor, one can consider creating a portfolio having a mix of growth-based funds and value-based funds and opt for the Systematic investment plan (SIP) to invest regularly. With this, investors can potentially benefit from favourable returns across diverse market phases.
Value Funds vs Contra Funds: Know the difference
Value investing is a time-tested approach where investors look for fundamentally strong stocks trading at a discount to their true worth. These stocks have the potential to bounce back when market sentiment improves, correcting to their fair valuation.
On the other hand, Contra Funds take a contrarian stance to capitalise on the growth potential of under-owned and out-of-favour sectors and stocks facing temporary challenges or going through a tough phase that impacts their performance, leading to distortions in their valuations. They endeavour to capitalise on these distortions by investing in sectors and stocks that are temporarily out of favour and available at significant discounts to their fair value. The aim is to have a first-mover advantage by investing in out-of-favour sectors/stocks thus increasing outperformance prospects.
While both Value and Contra fund managers have firm convictions in the fundamentals of the selected sectors and stocks in their portfolios, in the case of a Contra Fund, the fund managers do not necessarily limit their buying decision to the intrinsic value of the company. Instead, they also take contrarian bets going against the market perception. This is a fundamental difference between contra and value investing.
Will Value Funds continue to do well in 2024?
The Indian equity market achieved various milestones in 2023. Despite global uncertainties and geopolitical tensions, the equity market scaled all-time highs supported by resilient growth of the Indian economy and robust earnings of the corporate sector.
Going ahead, the upcoming general elections in India, the expectations of a rate cut by the RBI, earnings growth of India Inc., and global dynamics are among the key factors that will shape the future course of the market.
It is noteworthy that according to market experts, most sectors and segments (particularly low-quality mid caps and small caps) appear overvalued, though some stocks within those segments/sectors may still hold promise.
[Read: Will Small Cap Mutual Funds Continue to Outshine in 2024?]
So, while investors may continue to celebrate the market's recent feat, they should remain cautious and adopt a prudent investment approach.
Amid the significant broad-based rally in the last couple of years, the margin of safety in growth stocks has reduced. Though they may still continue to soar higher due to high exuberance among retail investors, in case of any negative trigger the downside risk can be significantly higher. On the other hand, since Value Funds invest in undervalued stocks, they can offer a better margin of safety.
Thus, Value Funds can form part of the 'Core' portfolio of every investor in 2024 and beyond.
What are the key benefits of investing in Value Funds?
Since Value Mutual Funds predominantly invest in undervalued stocks, they can potentially offer a better margin of safety compared to growth-oriented funds. Hence, Value Funds can act as an effective portfolio diversifier.
Value Funds tend to underperform during momentum-based market rallies that generally favour growth stocks. But when the market realises the true potential of value stocks, the prices of these stocks soar, and investors are rewarded with attractive gains. They may protect the downside risk better during bearish market phases and may outperform during stages of market recovery.
The only time when Value Funds have underperformed growth funds is during times of extreme market stability or secular bull run (which infuse risk-on sentiments and favour growth investing).
Value funds offer diversification in terms of style; so, when growth-oriented funds underperform, value-oriented funds may potentially outperform thereby minimising the portfolio risk. Notably, diversification across investment styles can reduce the downside risk and help investors earn optimal returns as if one approach fails to generate meaningful returns, the other may generate higher returns.
Moreover, in times when valuations look overpriced, the fund managers of Value Funds may go overweight on cash. This strategy helps them to benefit from value-buying opportunities during market corrections.
Performance of Value Funds – Bull phases
Past performance is not an indicator for future returns.
Data as of December 29, 2023. Direct plan - Growth option considered
(Source: ACE MF, data collated by PersonalFN)
Performance of Value Funds – Bear phases
Past performance is not an indicator for future returns.
Data as of December 29, 2023. Direct plan - Growth option considered
(Source: ACE MF, data collated by PersonalFN)
Who Should Invest in Value Funds in 2024 and beyond?
Since Value Funds invest predominantly in undervalued stocks trading at cheaper valuations, they often buy companies that are temporarily ignored. When such stocks undergo re-rating, they tend to reward investors.
How long the stock re-rating can take? Well, this remains the most uncertain part of value investing. For instance, during the initial phases of the COVID-19 pandemic, global markets went from neutral to an oversold zone in just a few sessions; therefore, the bounce back from the lows was sharper and trapped bears on the short side. On the other hand, several PSU stocks took the markets by surprise from 2020 onwards after experiencing muted growth for nearly a decade.
Since Value Funds invest in undervalued/out of favour stocks, the fund managers' bets may take time to payoff. Therefore, Value Funds may underperform in the short to medium term. However, over the long term, Value Funds can generate returns in line with growth-oriented funds or even outperform them. Hence, patience and perseverance are the key when it comes to value investing.
Value funds can form a part of the 'Core' portfolio of investors who can handle an extended period of underperformance and if the investment horizon is at least 7 years.
How are Value Mutual Funds taxed?
Value Mutual Funds are equity-oriented mutual funds and hence, they follow equity taxation. The holding period for Value Mutual Funds from a tax perspective is 12 months. So, if investors sell their Value Mutual Fund units before 12 months, the gains are subject to short-term capital gains (STCG) tax of 15%.
On the other hand, if they sell their Value Mutual Fund units after completing one year, the gains are subject to long-term capital gains tax (LTCG) of 10%, but only if the gains exceed Rs 1 Lakh in a financial year.
Which are the best Value Funds for 2024?
As we can see in the table below, most Value Funds have fared well over various time frames. Of these, we have shortlisted three funds that have fared well on risk-return parameters.
Past performance is not an indicator for future returns
Data as of December 29, 2023. Direct plan - Growth option considered; Returns are on a rolling basis and in %
(Source: ACE MF, data collated by PersonalFN)
Let us finally take a look at the three best Value Mutual Funds for 2024. Read on to know more...
Best Value Fund for 2024 #1: Bandhan Sterling Value Fund
Launched in March 2008, Bandhan Sterling Value Fund (erstwhile IDFC Sterling Value Fund) focuses on seeking value opportunities by investing predominantly in emerging businesses. The fund seeks opportunities in emerging businesses and those that are leaders/challengers in their respective fields.
Due to its higher exposure to stocks in the mid and small-cap segment Bandhan Sterling Value Fund is susceptible to higher volatility. However, its significant exposure to large caps and focus on picking undervalued stocks can offer better protection against downside risk, thereby generating decent risk-adjusted returns over the long term.
Fund Snapshot - Bandhan Sterling Value Fund
Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Portfolio data as of November 30, 2023
Returns and NAV data as of December 29, 2023. Regular Plan - Growth Option considered
(Source: ACE MF, data collated by PersonalFN)
With significant exposure across the market cap range, Bandhan Sterling Value Fund has displayed extraordinary performance in the recent broad-based market rally. Moreover, the fund has managed to compensate investors for the level of risk taken by generating superior risk-adjusted returns.
Although the fund has traits of underperformance during bearish market phases, it has proved its potential during recovery and bull market phases. This shows the fund's potential to perform well over the long run.
Best Value Fund for 2024 #2: Templeton India Value Fund
Launched in September 1996, Templeton India Value Fund is one of the oldest schemes in the value fund category. The fund's past performance was below ordinary and it often found a place among the bottom performers in the category. However, the fund has shown a remarkable recovery in the recent bull phase to find a spot among the top quartile performers in the Value Fund category.
Templeton India Value Fund aims to build a high-conviction portfolio of undervalued stocks picked through a bottom-up value investing approach and follows a buy-and-hold approach to derive its full potential. Templeton India Value Fund invests predominantly in large caps, along with substantial allocation in small caps.
Fund Snapshot - Templeton India Value Fund
Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Portfolio data as of November 30, 2023
Returns and NAV data as of December 29, 2023. Regular Plan - Growth Option considered
(Source: ACE MF, data collated by PersonalFN)
With a sharp upswing in NAV in recent years, the volatility recorded by the fund is much higher than the benchmark and the category average. Despite this, Templeton India Value Fund has managed to generate superior risk-adjusted returns as denoted by its Sharpe and Sortino ratio.
Best Value Fund for 2024 #3: ICICI Pru Value Discovery Fund
Launched in August 2004, ICICI Pru Value Discovery Fund is the most popular scheme in the Value Fund category. The fund has consistently ranked among the top quartile performers in the Value Fund category across time frames and has rewarded investors with superior risk-adjusted returns.
The fund's strategy of staying away from momentum-driven bets helps reduce the risk and enables it to outperform the benchmark and its peers. The fund adopts a 'Bottom-up' strategy, to identify and select undervalued stocks after evaluating them on several parameters such as historic performance, earnings, book value, free cash flow, and dividend yield.
Fund Snapshot - ICICI Pru Value Discovery Fund
Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Portfolio data as of November 30, 2023
Returns and NAV data as of December 29, 2023. Regular Plan - Growth Option considered
(Source: ACE MF, data collated by PersonalFN)
The fund maintains a large-cap bias but also holds substantial allocation to mid-cap and small-cap stocks depending on the attractiveness of the valuation in each of these segments. ICICI Pru Value Discovery Fund benefits from the expertise of its veteran fund manager, Mr Sankaran Naren, who is renowned for his contrarian investment approach and ability to identify value opportunities.
This completes the list of the 3 best Value Funds for 2024. Considering the volatile and uncertain nature of the equity market, it will be better to take the Systematic Investment Plan (SIP) route when you invest in the best Value Mutual Funds.
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Note: This write-up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully before investing.
DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.