What should you know about value funds?

Siddhi Sharma
/ Categories: Mutual Fund
What should you know about value funds?

There are various types of mutual fund schemes available in India, which are broadly classified into equity-oriented funds, non-equity oriented funds i.e. debt funds and hybrid funds. 

Within this broader category, equity-oriented funds consist of various sub-categories such as value funds, contra funds, focussed funds, and many more. We are going to discuss value funds in this article.  

Value funds are equity-oriented mutual funds, which invest in the stocks of the company that has ‘value’. What is meant by value? There are various ways in which value is defined. To value the company's stock, various metrics are used like price-to-earnings ratio (P/E ratio), price-to-book ratio (P/B ratio), dividend yield, and free cash flow. So, value funds invest in stocks that score relatively lower in the above ratio. 

Things to consider before investing: 

Risk: As these funds are equity-oriented, they are risky but less than growth funds. These funds are not for the investors, who are risk-averse but for those, who are more suitable for investors that are ready to take risks. These funds face market risk and volatility like any other equity fund. Value funds tend to outperform during bear markets. 

Investment horizon: Fund managers invest in stocks that are undervalued and can take some time to deliver returns. So, investors, who are willing to invest for a longer period of time, should consider investing in these funds. Investors should at least have an investment horizon of five years. This will help investors to receive optimal returns. 

Diversification: Fund managers invest in stocks of large-cap as well as mid-cap companies and also, pool corpus of investors in various sectors, which help investors to reap optimum benefit even if any particular sector is not performing well. 

Returns: Fund managers analyse and forecast the performance of the undervalued companies in the market and invest the capital of investors in companies having higher potential. Investors, who want regular investments, should consider investing in these funds. Dividends are paid periodically, depending upon the performance of the fund. These funds offer steady returns over a longer period of time. Due to the lower cost of these funds, they are quite cheaper than growth funds. 

Taxability: As these funds are equity-oriented funds, it will be taxed accordingly- 

Short-term capital gains (STCG): If capital gains arise within 12 months, then it will be taxed as per short-term capital gains at the rate of 15 per cent. 

Long-term capital gains (LTCG): If capital gains are arising after 1 year, then it will be exempted up to Rs 1 lakh while above Rs 1 lakh, it will be taxed at the rate of 10 per cent without indexation. 

The following chart depicts the top five value funds in India on the basis of 1-year, 3-year, and 5-year returns along with their AUM:

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