Best Value Funds to Invest in 2021

​​"We don't have to be smarter than the rest. We have to be more disciplined than the rest" - Warren Buffet.

This quote reminds us that value investing demands discipline and patience.

As we know, the prospects of the broader market diminished owing to events such as, demonetisation, implementation of GST, and liquidity crisis in NBFC. Therefore, investors over the past few years have been chasing momentum bets, leading to polarization in the market growth. And Value funds have indeed tested its investors’ patience with sharp underperformance in the last 3 years as compared to other categories.

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However, the pandemic-induced market crash provided valuable opportunities for bargain hunters and as a result, value funds have started doing well. Notably, some select PSU stocks (where value funds have significant allocation) have witnessed improvement in the past couple of months.

Value funds may continue to do well in the coming years if there aren’t any further economic shocks.

What are value funds?

Value investing is all about finding the 'hidden gems' of the equity market. Investors often look at the price of the stock while ignoring the value that it commands.

The fact is, it's important to pay the right price for the right stocks. This is exactly what Value funds endeavour to achieve. These funds aim to pick undervalued stocks, i.e. the stocks' current market price is lower than its intrinsic/fair value, but with strong fundamentals and high growth potential.

As per SEBI norms, value funds are equity-oriented mutual funds that follow the value-investment strategy, investing minimum 65% of its assets in equity and equity related instruments with the flexibility to invest across market capitalisation.

Graph : Placement of value funds on risk-return spectrum

Note: For illustrative purpose only
(Source: PersonalFN Research)

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, its prices soar and investors are rewarded with attractive gains.

In some ways, value funds can offer a better risk-reward potential because they are better positioned to manage the downside risk during a market fall, but they may not participate well during a bull run. This makes value funds riskier than multi cap funds.

Since value funds invest in undervalued/out of favour stocks, the fund managers' bets may take time to payoff. Therefore, value funds can underperform in the short to medium term.

Value funds can form a part of your core portfolio; if you can handle an extended period of underperformance and if your investment horizon is at least 7-10 years.

Table: Performance scorecard of value funds

Scheme Name Absolute (%) CAGR (%)
1 Year 2 Years 3 Years 5 Years 7 Years
JM Value Fund 15.59 15.31 5.34 14.63 18.19
Tata Equity P/E Fund 14.96 12.32 5.03 14.06 18.78
UTI Value Opp Fund 20.97 17.06 10.07 12.65 13.55
L&T India Value Fund 16.86 12.41 3.12 11.70 19.50
Nippon India Value Fund 18.01 13.25 5.35 11.50 16.11
HDFC Capital Builder Value Fund 14.66 8.66 3.76 11.46 15.51
IDFC Sterling Value Fund 17.81 7.45 -0.63 10.77 15.01
ICICI Pru Value Discovery Fund 25.56 14.03 7.28 10.67 17.47
Quantum Long Term Equity Value Fund 14.58 7.69 4.80 9.83 12.59
Templeton India Value Fund 13.10 7.91 0.33 9.34 13.19
Aditya Birla SL Pure Value Fund 17.22 4.58 -6.20 7.78 17.38
S&P BSE 200 - TRI 18.94 15.65 9.99 13.93 14.81
S&P BSE 500 - TRI 19.40 15.19 8.68 13.53 14.80
Data as on January 04, 2020
(Source: ACE MF)
*Please note, this table only represents the best performing Value Funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.
Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing.

As seen in the table above, value fund performance has seen a remarkable improvement in the last one year. The category's long term potential can be assessed by the returns over the longer 7-year horizon where various schemes have generated high double-digit returns.

Top value funds to invest in:

Based on our analysis and research at PersonalFN, UTI Value Opportunities Fund is currently the best schemes in the value funds segment. The fund has rewarded investors well by following superior portfolio strategy and maintaining a highly diversified portfolio of fundamentally sound stocks across the market cap segment that has helped it stand strong in times of turbulence.

Some other decent performing value funds are:

It is often observed that some value funds take high exposure to growth stocks in a bid to boost returns. Such funds should ideally be avoided because the downside risk in such funds can be relatively high. Stick to value funds that focus on the guiding principles of 'Value Investing' while constructing the portfolio.

Moreover, to select a worthy value fund, analyse the schemes based on various quantitative and qualitative parameters.

Here's how you should select a value fund...

Image by Gerd Altmann from Pixabay

Quantitative Parameters:

Analyse if the fund has shown consistency in performance across various market periods (bull and bear market phases) as compared to the benchmark and category peers. Value funds can go through a prolonged phase of underperformance or performance deviations from benchmarks or other funds. But if a fund consistently underperforms even when most peers are doing well, you should consider looking for alternatives.

While selecting value funds, it is important to assess its ability to contain the downside risk. Therefore, determine whether the fund has rewarded its investors well for the risk taken using risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

A fund that stands strong in the risk-reward parameters should rank higher while short listing funds for your portfolio.

Qualitative Parameters

Qualitative parameters are often overlooked though they are a vital aspect in the selection process. It involves determining the quality of the portfolio and the efficiency of fund manager/house.

The fund house should have a fairly long track record and must follow robust investment processes with adequate risk management systems in place.

And since the performance of a value fund is directly dependent on the ability of its fund manager to spot the growth potential of undervalued/out of favour stocks in different sectors/market capitalisation at an early stage, check the qualification and experience of the fund manager and the track record of the other schemes managed by him/her.

In addition, the fund's portfolio must be well diversified across stocks/sectors with a focus on quality at sensible price because a concentrated portfolio can expose the investors to higher risk.

Moreover, keep a tab on the churning rate of the securities in the portfolio because a high churning rate can make the portfolio prone to volatility and negatively impact the overall returns of the scheme. Analyse the portfolio’s turnover ratio and expense ratio to assess how efficiently the fund controls the churning and limits the expenses.

Yes, we know that the above list is a lot for an average investor to look at. It involves a lot of number crunching and much of the data is not easily available in one place. But if you do need to narrow down on the top funds, these factors are of utmost importance.

Watch this short video on selecting mutual fund schemes:

At PersonalFN, we select and recommend mutual funds based on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:

S - Systems and Processes

M - Market Cycle Performance

A - Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

The outlook for value funds in 2021:

Value funds are expected to make a comeback if the economic recovery sustains. Even though the market is trading at an-all time high valuations, value buying opportunities exists in various beaten down sectors such as construction, automobile, real estate, etc. These sectors can bounce back when the pent up demand drives economic growth.

Amid the pandemic, corporates have focused on driving efficiency, deleveraging their balance sheets and undertaking cost-control measures. Low interest rate scenario also bodes well for corporates looking to raise capital.

Thus, an improvement in demand can result in higher revenue and profit. Therefore many value stocks still offer attractive value points and can benefit from re-rating as corporate earnings grow.

Value funds act as a good portfolio diversifier due to better margin of safety. So, the improvement in performance of value funds category should not be seen as an opportunity to redeem your investment. Consider its role in your overall asset allocation plan and your financial goals and then take suitable decision.

PS: PersonalFN has completed 20 years of unbiased research service and we want to celebrate it with our loyal readers and subscribers like yourself. Get PersonalFN's model mutual fund portfolio service 'FundSelect Plus' in this exclusive anniversary offer. As a FundSelect Plus subscriber, you will get access to 7 ready-to-invest premium mutual fund solutions with high performance potential. Subscribe now!

Warm Regards,
Divya Grover
Research Analyst

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