Value Funds - Do You Have The Patience To Hold?

Value investing is something which is adopted by many successful investors like Warren Buffett and this is the style of investing which is adopted by value funds as well. DSIJ evaluates and explains value funds as a sub-category of equity scheme and what should be your approach towards them.

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The confluence of various factors, including economic policy and geopolitical developments, is making the equity market nervous and undecided. In the last six months, issues such as moderation in GDP growth, increase in surcharge and trade war between the world’s two largest economies have led investors to be the risk-averse world over. So, where should an investor seek protection in the current market situation? When you face such situations, history should be your guide and it suggests that value investing has worked in these uncertain times.

The value investor works like a shrewd buyer who makes the most of the end of season sale. These investors come out with their wishlist and go out on a shopping spree. Chances are high that they would get quality products at lower prices.

In the investing world, the fund manager of an equity value fund builds a portfolio of stocks that are available at cheap valuations. The lower price may be due to various reasons. It may happen that the true market value of a stock is widely miscalculated or not realized by the market and hence the share price is trading below its intrinsic value. However, as and when the market realizes its potential, the stock will be re-rated and its price will move up and, thereby, the investors can reap a huge benefit.

This is just the opposite of growth funds, which typically invest in high growth companies from the sunrise sectors. Investors easily get convinced by the growth of these companies and hence get attracted to these growth funds. While it is true that they do generate returns by investing in well-accepted growth funds, they also run the risk of paying too much for too little.