in price and value of the stock.
But all investors are not equipped to handle the analysis on their own. Investing is an art, more so in equities, due to its inherent volatility. To avoid making a wrong decision, investors can choose the mutual fund route for investing in value funds, thereby benefiting from professional fund management.
Key benefits of investing in value funds
Asset Allocation: A critical aspect of financial planning is right asset allocation, better known as diversification. While it is more common to diversify the investment across various asset classes (equity, debt, gold), you can also reduce portfolio risks by diversifying your investment style between growth (investing in proven companies and sectors that would grow) and value (investing in unacknowledged fundamentally strong companies available at very attractive prices).
Downside protection: Value investing hinges on investing in undervalued but fundamentally strong companies. This helps reduce the risk of loss in the long term due to this built-in margin of safety. Also, typically, the decline posted by value stocks is less in a bear phase vis-à-vis that posted by growth stocks. One must also keep in mind that while these funds are better off in a bearish phase, they may lag the market in a bullish phase as they invest in undervalued stocks and not high growth stocks. The exception, however, would be those stocks which get re-rated from value to growth once they are discovered by the market at large. The unlocked value from such stocks provides a significant upside.
India gradually discovering the merits of value investing
Value investing is one of the most popular investment themes globally. For instance, AUMs of Value Funds in the US is approximately 85 per cent of the AUMs of Growth Funds. As against this, in India, AUMs of Value Funds is merely about 10 per cent of the combined AUMs of Growth Funds and funds applying other strategies. While most investment gurus would proclaim India to be a growth market where growth investing is the most suited investment style, the truth is that Indian markets offer a good opportunity to use value investing.