Why opt for Value-Oriented Funds?

A wise person once said, “Price is what you pay, value is what you get.” This person is none other than Warren Buffett, one of the most successful investors. One of his most talk about investment strategy revolves around Value Oriented Funds. Value investing revolves around identifying stocks which are fundamentally strong but are currently out of favour or trading at a significantly lower level. Investors of these funds believe that the market will realize the true worth of these stocks in the long run, especially across different market cycles. The two skills that a value investor should possess are patience and due diligence.

Here are some of the key characteristics of Value-Oriented Mutual Funds:

1: True Potential

Value investors don’t judge a book by its cover. Rather they believe in analyzing its content i.e. true worth. The USP of a value-oriented mutual fund is its potential to outperform or minimize the losses during a bearish phase.

2: Diversification

Value-oriented mutual funds are best used for your portfolio’s diversification. They can complement other equity mutual funds (especially growth stocks). in case of a market correction, they help to cushion or minimize the impact of downtime.

3: Long term game

Patience is a virtue, especially for value investors. Relying solely on recent performance means overlooking a critical aspect of value investing. Value-oriented Mutual Funds can continue to underperform significantly in the short-term. It can take a lot of time for the market to realize the true underlying value of the stock and translate into returns. However, the trick is to not get bogged down by the same and hold on to these mutual funds for the long-term. You need to remind yourself that consistency is not the strength of value-oriented mutual funds. But they have the potential to offer superior risk-adjusted returns in the long run.

4: Margin of Safety

This is one of the most crucial terms in value-based investing. The margin of safety is the difference between the stock’s true worth (also known as intrinsic value) and the current trading price. It represents the potential income from your investment. There is no fixed guideline as to how big the margin of safety should be for each investment. It depends purely on your own risk profile, volatility tolerance and belief in the stock’s true value.

5: Value Traps

The core of value investing relies on picking undervalued stocks. However, it is important to distinguish undervalued socks from low-quality stocks. Many so-called value-oriented funds consist of cheaper stocks (due to low PE). You should be beware of such value traps. It is important to be selective and stick with fundamentally strong funds that retain adequate quality in the portfolio and not compromise it in the quest for value.

6: Know your investment

To be a successful value investor, you need to know every minute detail about the company you have invested in - its strengths, weaknesses, competitors, the reason for the discounted stock price, etc. Value investing is not possible through passive management.

Performance of Value-oriented mutual funds

These mutual funds have displayed stellar performance in the last decade. As per a report published by Value Research, value-oriented funds have generated 13.7% returns. During the same period, large-cap and mid-cap equity mutual funds could only manage 11% and 12.8% returns. The rolling returns (5-year as well as a 10-year time period) also display strong outperformance.

Here is our recommendation for the ten best value-oriented mutual funds.

• Kotak India EQ Contra Fund

• Invesco India Contra Fund

• IDFC Sterling Value Fund

• Nippon India Value Fund

• UTI Value Opportunities Fund

• Tata Equity PE Fund

• HDFC Capital Builder Value Fund

• L&T India Value Fund

• ICICI Prudential Value Discovery Fund

• SBI Contra Fund

Final Words

Warren Buffet had rightly summarized Value Investing as “Be fearful when others are greedy and greedy when others are fearful”. Value-based mutual funds can be the strongest weapon in your armour, especially when you are ready to wait it out.