Value Funds

A value fund is an equity mutual fund that follows a value investing style. It primarily invests in businesses that the fund manager considers underpriced relative to their intrinsic or fair valuation. These businesses may be facing a temporary business obstacle, industry downturn, or market pessimism. However, their financial fundamentals often remain strong.

Under the Securities and Exchange Board of India (SEBI) categorisation rules, value funds are defined as equity schemes that follow a value investment strategy. SEBI mandates that such equity schemes should invest a minimum of 80 percent of total assets in equity and equity‑related instruments and adhere to a documented value investment strategy stated in the scheme’s offer document.

In practice, a value fund is an actively managed equity scheme that seeks exposure to securities considered mispriced, while maintaining the asset allocation mandate.

How Does a Value Mutual Fund Work?

A value fund collects capital from investors and deploys it in carefully chosen stocks based on a defined investment strategy. The fund manager conducts fundamental analysis to determine undervalued stocks, including reviewing financial statements, profitability trends and debt levels. The manager also examines cash flow strength and sector positioning as part of assessing fundamental strength and valuation.

The fund manager compares the market price with the estimated intrinsic value before investing to decide whether a company qualifies as a value pick.

Net Asset Value (NAV) represents the per‑unit value of the fund, calculated by dividing the total value of the fund’s assets (after expenses and liabilities) by the number of outstanding units. Thus, the NAV changes in response to the rise or fall in the value of the fund’s holdings

Value strategies tend to target sectors or companies that are currently out of favour, and price recovery often requires patience, because market recognition of intrinsic value can be a slow process.

Advantages and Disadvantages of Value Funds

Investors should assess the specific traits of value funds to understand how they fit into a broader investment strategy. A balanced view of benefits and risks helps in informed decision‑making.

Advantages

• Margin of Safety: Value fund seeks exposure to securities trading below estimated fair value. The stocks may already be priced lower. So the downside risk during market corrections is often lower than that of higher valuation growth stocks. But losses may still occur during such phases.
• Potential for Re-rating: If market perceptions change and valuations improve, the price may go through a beneficial upward re-rating. This shift can lead to favourable gains that outperform broader indices over long durations. The strategy may require patience, as valuation re-rating can take time.
• Dividend Income: Many undervalued companies may be well-established enterprises with steady cash flows. Such companies may distribute a part of their income as dividends to the shareholders. These payouts may contribute to total return, although they do not eliminate market volatility.

Disadvantages

• Long Gestation Periods: Value stocks may take several years to be discovered by the market, as they have a lot of potential. It requires patience and a long-term viewpoint on the part of the investors. The performance in the short-term may often lag behind growth-focused standards.
• Threat of Value Traps: It is one of the key risks of this fund because a company may seem inexpensive, yet it might face a substantial decline. The miscalculation of the intrinsic value by the fund manager may reduce the chances of the investment making a recovery. Under such circumstances, recovery can be minimal, and returns could be stagnant.

Who Should Invest in Value Funds?

These funds are suitable for investors whose goals, risk tolerance, and time horizon align with a value‑oriented, long‑term investment strategy.

• Long‑term investors: This type of investor is someone with an investment horizon of at least several years. Value strategy takes time to realise potential gains, and this approach may not align with short‑term financial goals.
• Risk‑aware equity investors: These funds may appeal to investors who want market exposure but prefer equities with potentially lower downside risk compared to high‑valuation growth stocks. Focusing on fundamentally strong, undervalued stocks can be a more stable approach for investors who believe in buying low and selling high.
• Investors seeking diversification: Value funds can complement a portfolio that already has high exposure to growth or index funds. Including value‑oriented equity can help spread risk across different investment styles and reduce concentration in a single approach.
• Long‑term goal‑oriented savers: If a person is working towards a long‑term goal, such as retirement, wealth accumulation, or a major purchase many years ahead, value funds can be a suitable component of a diversified portfolio. Investors should ensure that their risk tolerance and overall asset allocation match the time horizon and objectives before investing.

How to Invest in Value Funds?

HDFC Sky helps investors to easily invest in value funds through their online platform.

Step 1- Open an account with HDFC Sky

You can either download the HDFC Sky app or access our online platform. In online account registration, submit your personal information together with your PAN card and ID proof. You can open an account for free, and you can complete your KYC process through the online system, which will let you start using your account.

Step 2- Log in and navigate to Mutual Funds

After account activation, use your credentials to log in to your account. The main dashboard contains the Mutual Funds section, which lists all available investment options for you to select.

Step 3- Select your value fund

Use either the browsing function or the search function to find the specific value fund you want to invest in. HDFC Sky gives users access to more than 2000 mutual fund schemes, which belong to 29 different fund houses. The platform lets you view scheme information, fund comparison, and historical performance data before you make your final decision.

Step 4- Decide between Lumpsum or SIP

Select your desired investment method.

• Lump sum- You make a single investment in the fund.
• SIP or Systematic Investment Plan- You can invest a fixed amount regularly.

Enter the amount to invest.

Step 5- Place order

Verify all the information, like the name of the fund, the amount of money invested, and their investment preference as either growth or IDCW. Check all details and proceed with the transfer of money. Payment can be made via NetBanking, UPI and debit/credit card transfer. On confirmation, the units will be allocated to your account as per the NAV (Net Asset Value) applicable.

Factors To Consider

When evaluating value mutual funds, investors should review key technical and strategic factors to ensure suitability and alignment with their financial goals.

• Investment horizon: A horizon of five to seven years or more is typically recommended for value funds because undervalued stocks may take time to reflect their intrinsic worth in market prices. During this period, value strategies may lag growth‑oriented strategies. Investors must be prepared for extended periods of underperformance relative to benchmarks.
• Risk profile: Although value funds invest in stocks considered undervalued, they remain equity‑oriented and are subject to market risk and stock‑specific risks. Poor company selection or incorrect valuation estimates by the fund manager can lead to underperformance. Investors should assess whether they can remain invested through periods of volatility.
• Expense ratio: The expense ratio reflects the cost of managing the fund and is deducted from the NAV. A higher expense ratio can erode returns over time, especially if value performance takes longer to realise. Comparing direct and regular plan expense ratios is recommended.
• Fund manager experience: Value investing requires disciplined fundamental analysis and conviction. Investors should examine the fund manager’s track record across market cycles and whether the manager has consistently applied the value strategy. Past performance is not a guarantee of future results but can indicate experience and consistency

Taxation on Value Funds

Value funds are classified as equity mutual funds for taxation purposes. Tax will be determined by the holding period.

• Short-term capital gains tax- Applicable on funds sold within 12 months. Tax rate is 20% (plus cess/surcharge)
• Long-term capital gains tax- Applicable on funds sold after being held for more than 12 months. Tax rate is 12.5% on gains exceeding 1.25 lakhs in a financial year.

IDCW payout, if distributed, is taxed in the hands of investors at their applicable slab rates. TDS may apply at 10% if returns are over ₹10,000.

The tax laws can change, and investors must look at the existing tax laws and scheme disclosures to treat them accurately.

Conclusion

Value funds follow a valuation‑driven investment approach grounded in fundamental analysis. They seek companies trading below intrinsic worth and aim for market recognition over time.

This strategy demands patience and awareness of equity market risks. Investors should align value fund allocation with long‑term financial objectives, overall asset allocation, risk tolerance, and investment horizon. Style diversification (balancing value with growth or other strategies) can enhance portfolio balance. Structured evaluation helps investors participate with confidence.