Value funds help balance growth portfolios; invest with 5-year view

Those unable to withstand periods of underperformance may avoid these funds

Inflows into value and contra funds surged from Rs 1,141 crore in August to Rs 2,108 crore in September, an 84.7 per cent month-on-month increase, according to data from the Association of Mutual Funds in India (Amfi). Thirty-nine funds in this category have total assets under management (AUM) of Rs 2.07 trillion.

 

“The increase indicates a recovery from the low levels seen in the June quarter. Flows have returned to levels seen in March,” says Piyush Gupta, director – financial services, Crisil Intelligence.

 

Over the medium to long term (five, 10 and 20 years), value funds have delivered robust returns relative to the broader market. “Even during the recent one-year market correction, value as a category largely performed in line with markets,” says Amit Premchandani, senior vice-president and fund manager – equity, UTI Asset Management Company (AMC). 

Between 2016 and 2020, quality-oriented stocks outperformed while value investing lagged. After the Covid period, cyclical and value-oriented sectors rebounded strongly, supported by earnings recovery and re-rating. “The strength of their performance over the past four years has been pronounced, leading to the value theme once again capturing investor attention,” says Chintan Haria, principal – investment strategy, ICICI Prudential Mutual Fund.

 

How a value fund works

 

Value investing is guided by two principles: intrinsic value and margin of safety. “Stocks are chosen when they trade at a discount to their intrinsic value. Margin of safety reflects the difference between intrinsic value and market value. The higher the difference, the higher is the margin of safety,” says Haria. 

 

Fund managers identify undervalued stocks through metrics such as price-to-book value (P/B), price-to-earnings (P/E) ratio, and so on. “Value funds buy stocks trading at a significant discount to their intrinsic value, but which have long-term growth potential,” says Gupta.

 

Why invest now

 

Value investing focuses on sectors currently out of favour but with long-term value. “As market cycles turn and sentiment shifts, such pockets often deliver meaningful returns,” says Haria.

 

Earnings expectations for FY26 have moderated, narrowing the gap between projections and actual performance. Fiscal and monetary policy now favour growth and consumption. “We expect a cyclical rebound in growth which should flow down to earnings,” says Premchandani.

 

Gupta adds that value funds complement growth holdings, helping investors achieve style diversification in their portfolios.

 

Periods of underperformance likely

 

Value funds tend to underperform when the market favours the growth style. Moreover, these funds follow a contrarian approach, investing in stocks that appear undervalued. “They can face prolonged underperformance as undervalued stocks may take time to recover,” says Himanshu Srivastava, principal manager – research, Morningstar Investment Research India.

 

For patient investors

 

These funds suit investors with a long-term horizon. “Patience and a long-term mindset are key prerequisites for investing successfully in value funds. Since re-rating of undervalued stocks takes time, investors should have a minimum horizon of five to seven years,” says Srivastava.

 

Some investors should steer clear of them. “Investors who don’t understand the value strategy, lack a long investment horizon, and are unwilling to wait for the strategy to play out should avoid them,” says Arnav Pandya, founder, Moneyeduschool.

 

Expert advice

 

Investors who have already invested in growth should diversify across styles. “Growth and value are divergent styles which follow their own cycles of under- or outperformance over the short to medium term,” says Premchandani. According to him, these funds should be part of an investor’s core portfolio.

 

Investors will be better off following the systematic investment plan (SIP) approach in these funds. “Invest regularly over time to average out the cost of acquisition under different market conditions,” says Pandya. He suggests allocating up to 5 per cent of the total equity portfolio to these funds.