Value funds' outlook: Broad-based earnings recovery could boost performance

A shift in sector leadership could also favour these funds

Value funds held their ground among diversified equity funds in 2025 despite a range-bound market. They have delivered an average return of 8.6 per cent over the past year, second only to large-cap funds’ 9.7 per cent.

 

Value funds invest in stocks that are attractively priced and aim to benefit as prices catch up with intrinsic value. “The idea in value investing is that the market will eventually recognise the true worth of these stocks, leading to price increases,” says Parul Maheshwari, certified financial planner.

 

According to data from the Association of Mutual Funds in India (AMFI), 25 value funds managed assets worth ₹2.17 trillion, as of November 30, 2025.

 

The road ahead

 

A broad-based recovery in earnings in 2026 could provide a supportive environment. Value funds currently accumulating stocks at reasonable valuations may benefit.

 

“Even when broader indices are trading at elevated valuations, individual names may be going through a period of underperformance, thereby creating opportunities to buy good businesses at reasonable prices,” says Dharmesh Kakkad, senior fund manager, ICICI Prudential Asset Management Company (AMC).

 

Value funds perform well when market leadership changes. “They are especially useful when sector rotation commences, and markets vacate an exhausted theme. We may be in one such phase currently as government policies on tax cuts, Goods and Services Tax (GST) rationalisation, and the Reserve Bank of India’s (RBI) efforts on policy easing have prompted a look back into consumption from capital spending-oriented areas,” says Jitendra Sriram, senior fund manager, Baroda BNP Paribas Mutual Fund.

 

Test investors’ patience

 

Value investing requires patience as the process of value unlocking can take time. “There will be phases when the value theme may not deliver returns,” says Kakkad.

 

Market cycles often reward different investment styles at different times. “Over a complete market cycle, there could be periods when markets may reward styles such as momentum, growth and quality. Value funds tend to underperform during such phases,” says Kakkad.

 

In actively managed value funds, fund manager skill plays a critical role, as identifying and quantifying underlying value and buying at the right price are central to outcomes. Investors seeking to minimise fund manager risk and costs may consider value index funds with large assets under management and low tracking error.

 

Long holding period necessary

 

Value funds are best suited for investors with a long investment horizon. Units of these funds should ideally be accumulated through systematic investment plans (SIPs). “Those with the ability to stay invested for more than five years may buy value funds. Trend chasers and short-term investors with a time horizon of one to three years should avoid them,” says Maheshwari.

 

Kakkad emphasises that value fund investors also need to have a long-term orientation due to the market’s tendency to reward different investment styles at different times.

 

Allocate based on risk profile

 

Allocation to value funds should be guided by individual risk tolerance. “These are clearly part of one’s ancillary portfolio. For a normal investor, ancillary investment can be between 15 and 25 per cent, while for high net-worth individuals (HNIs), it could be a larger part of net worth,” says Sriram.

 

Aggressive investors may supplement ongoing SIPs with lump-sum investments during market corrections.

 

Check portfolio quality

 

A few common mistakes must be avoided. “The biggest mistake is to confuse a low price-to-earnings (P/E) fund with value, leading to a value trap. Check the quality of the underlying stocks. Investors also tend to buy value funds after they have had a spectacular run and expect quick returns. An SIP strategy can help here,” says Maheshwari.

 

These funds should also not be treated like a broad market strategy. “Do not look at the value theme as a regular market investment and compare its performance to popular indices. Large weightages without a clear understanding may lead to investor fatigue and frustrated exits,” says Sriram. 

 

The writer is a Gurugram-based independent journalist