Once out of favour, Value funds now weathering market storm better

These funds had, on an average, generated returns of -7.4% during past three months, compared with negative returns of 8-10% by large-cap, mid-cap and small-cap funds

Indian equities have seen sharp sell-off this year due to the geopolitical tension and outflows by foreign portfolio investors (FPIs). High-beta stocks, which performed better over the past two years, have borne the brunt of the correction. But value stocks, which had once run out of favour, seem to have weathered the market storm better. This category of equity mutual funds has outperformed most other segments in that space recently.

Data from Value Research shows that value funds had, on an average, generated returns of -7.4 per cent during the past three months, compared with negative returns of 8-10 per cent by large-cap, mid-cap and small-cap funds.

Value funds invest in stocks and sectors that have long-term growth potential and are available at attractive prices. In the past few years, when markets were rising, growth funds continued to deliver better returns compared to value funds.

But now when markets have turned volatile, value as a category has started outperforming other categories. Even during the past one-year period, value funds have managed to give better returns than large-cap and flexicap funds.

“Prior to the Russian invasion of Ukraine, markets expected a strong rebound in economic growth and consequently higher levels of inflation thereby signaling the bottoming of interest rates. In such a scenario, we expect value to do better than growth,” said Daylynn Pinto, senior fund manager – equity at IDFC asset management company (AMC).

Typically, a value fund invests in stocks which have the potential for reasonable upside but are currently available at a discount to its fair or intrinsic value. Value fund managers always look at companies that are below their intrinsic value.

In the last one-year fund such as IDFC Sterling Value, ICICI Prudential Value Discovery, and SBI Contra funds have given returns in the range of 20-24 per cent. Even in a three-month period several of the value funds have just fallen by 3-7 per cent.

Nilesh Shetty, fund manager- equity at Quantum AMC said, “Value as a style tends to do well when there is a broad-based economic recovery and the growth differential between value stocks and growth stock narrows. We are seeing early indications of India about to embark on a multiyear economic upcycle and in that environment value style is expected to do well.”  

Market participants say that if there is further recovery in the economy and earnings upgrades, value funds will continue to do well.