Earnings recovery can revive value funds, invest with 5-year horizon

Allocation to these funds is essential for style diversity within portfolio

Value funds delivered strong returns in 2023 (up 35.2 per cent) and 2024 (20.1) per cent. However, they have had a turbulent 2025, with a category average loss of 2.8 per cent over the previous year. Despite this, investors remain optimistic, pouring in Rs 1,470 crore in July 2025. As many as 38 schemes managed assets worth Rs 2.04 trillion (as on July 31), according to data from the Association of Mutual Funds in India.

 

“Value funds had a good run over three to four years as the economic recovery played out post-Covid. Some cyclical adjustment may have played out in the last 9-12 months on this style,” says Krishna Sanghavi, chief investment officer, equities, Mahindra Manulife Mutual Fund.

 

Spotting value picks

 

Value funds perform well when mispriced opportunities abound. “These funds have the potential to deliver superior returns over the long term by identifying and investing in cheaper stocks that have the potential to appreciate. These funds also offer downside protection, as they focus on undervalued stocks,” says Sonam Udasi, senior fund manager, Tata Mutual Fund.

 

Alongside actively managed value funds offered traditionally, passive options have been launched in the recent past. Active schemes are diversified across market caps. Index-based funds suit those wary of fund manager risk. For example, Nifty50 Value 20 index funds focus on largecaps, while Nifty500 Value 50 index funds offer broader exposure.

 

Scope for turnaround

 

Value funds can cater to long-term wealth creation as the pace of earnings revives. “Broadly, value as a category does well when growth is broad-based, with valuations at or below fair zones. Since the early part of 2025, valuations have been on the higher side, which can be a challenge. Incrementally, the correction in the broader markets in the past few months and expectations of earnings growth recovery are positive for the value style,” says Christy Mathai, fund manager–equity, Quantum Asset Management Company.

 

“As the economy recovers and market momentum broadens, value funds are likely to do well. Broader markets tend to offer more opportunities for value investing. With the current market consolidating for the past year, it is an opportune time to consider value funds with a three-year investment horizon,” says Udasi.

 

Beware of volatility

 

Value funds can be volatile in certain market conditions. “Value funds typically do well in phases of the market cycle where valuations are reasonably supported by earnings growth. In euphoric phases where markets do not give much credence to valuation or quality of companies, the value style may disappoint. An investor needs to be prepared for underperformance in such phases,” says Mathai.

 

Some schemes also invest in turnaround or restructuring stories, which can unlock value but are riskier and often take longer to play out.

 

Long-term play

 

Experts say all long-term investors can consider value funds. “These are diversified to capture opportunities across market caps via stocks that are undervalued vis-à-vis the market. This characteristic makes them a good fit for the core portion of equity allocation. The ideal holding period for a value fund, like any other equity fund, is more than five years,” says Mathai.

 

Systematic investment plans should be the preferred route. “Investors willing to ignore market momentum and instead focus on earnings that can deliver a re-rating can invest in value funds. Allocation can be between 20 and 50 per cent of the equity allocation,” says Sanghavi.     Robust long-term track record 

Period	Category average return (%)
1-year	-2.8
3-year	18.3
5-year	22.9
10-year	14.3

  Source: PBCS.in         

(The writer is a Gurugram-based freelance journalist)