One of the benefits of investing in mutual funds is that there is a wide variety of funds allowing every investor to find a type that suits their risk-return preference and investing strategy and style. Some of the more common types of equity mutual funds are large-cap funds, equity-linked savings scheme funds, and index funds. And value funds are another type of lucrative equity fund.
Value funds follow the value investing strategy made popular by legendary investors such as Warren Buffett. Value funds essentially invest in value stocks – stocks that are priced below their intrinsic value. And here are some other things you should know about before you invest in value funds.
- Focus on stocks that are undervalued
Value funds focus on stocks that the stock market is undervaluing or underestimating given the companies’ financial fundamentals and track record. That’s because they aim to benefit from the value stocks’ price appreciation over time as the market begins to realize its intrinsic value.
- Invest in stocks that belong to financially sound companies
It’s important to note that value stocks are typically the ones that belong to financially sound companies with an established track record and not new companies where their success is uncertain. Often, value stocks are stocks of companies that may have taken a temporary hit due to a variety of reasons such as bad publicity or a minor scandal due to which its share price dropped. But given its financial fundamentals such as price-to-book ratio, cash flow, operating expenses, etc., the company is financially doing well, and its stock price is not fairly representing that in the market currently.
- Suitable for long-term investors
The strategy behind value investing is to invest in stocks that are well-placed for capital appreciation over time. Since value funds invest in stocks that are trading in the stock market at lower prices when compared to their financial fundamentals, it’s important to hold such an investment for the long term so that you can benefit from capital gains when the market price catches up. Thus, consider your financial goals and investment horizon before you decide to invest in value funds.
- Different from growth investing
Value investing and growth investing are two of the most popular investing strategies that are often compared against each other. Growth investing follows an approach where it invests in stocks with a high growth potential at a higher price and is hence different from value funds that follow the value investing strategy. Tech stocks are typically growth stocks while stocks such as consumer staples, financials, and industrials.
Investing in value funds
Investing in value funds is a smart way to benefit from value stocks primarily because you have a professional fund manager who is strategically stock picking. To identify and accordingly invest in value stocks requires an expert, someone who has a deep understanding of the market and different industries. Hence, investing in value stocks through value mutual funds is a safer way of adding value stocks to your portfolio.