For investors aiming to use the recent correction to gradually increase equity exposure for long-term wealth creation, value investing can be an effective route.
Value funds aim to capitalise on short-term market pessimism by investing in fundamentally strong businesses available at attractive valuations.
In other words, they focus on identifying fundamentally strong stocks trading at a discount to their intrinsic value.
These stocks can rebound when market sentiment improves, aligning with their fair valuation.
If you are looking to take advantage of the growth potential of the undiscovered gems of the stock market then value mutual funds can offer a worthy opportunity.
As these funds invest in undervalued stocks, they can potentially offer better margin of safety compared to growth-oriented funds.
In this editorial, we look at four value funds that delivered over 15% XIRR on SIP investments in 10 years.
#1 HSBC Value Fund
Launched in January 2010, HSBC Value Fund, earlier known as L&T Value Fund, aims to pursue quality businesses using a blend of value and growth investing and a bottom-up approach to generate alpha.
Further, the fund benefits from the continuity of its fund manager, Venugopal Manghat, who has been managing the schemes since 2014.
It has established a track record of generating robust returns across most time frames and rewarding investors with meaningful gains over the long run.
It currently has an AUM of Rs 153 billion, the second largest in the category.
A monthly SIP of Rs 10,000 over a 10-year period, meaning a total investment of Rs 1.2 m, in HSBC Value Fund would have now grown to Rs 2.97 m.
This translates into an XIRR of 17.2%.
Its top stock holdings are ICICI Bank, HDFC Bank, Karur Vysya Bank, The Federal Bank, and SBI.
It invested 41.4% in large caps, 17.5% in mid caps, and 37% in small caps.
#2 JM Value Fund
Originally launched as a Sectoral Fund in June 1997, this fund was recategorised and renamed to JM Value Fund in 2018.
While the past performance is not comparable due to the change in investment mandate, JM Value Fund has turned out to be a category outperformer by delivering robust gains in recent years.
The fund’s high portfolio churn strategy and substantial exposure to lower market cap stocks has enabled it to generate high alpha over the years.
It currently has a relatively low AUM of Rs 8 bn.
A monthly SIP of Rs 10,000 over a 10-year period, meaning a total investment of Rs 1.2 m, in JM Value Fund would have now grown to Rs 2.83 m.
This translates into an XIRR of 16.4%.
Its top stock holdings are Redington, ICICI Bank, Shriram Finance, L&T, and Infosys.
It invested 36.1% in large caps, 7.7% in mid caps, and a major 53.3% in small caps.
#3 Nippon India Value Fund
Launched in June 2005, Nippon India Value Fund aims to identify undervalued stocks across market caps having high potential by using fundamental analysis.
It endeavours to avoid value traps where the long-term growth is uncertain or can be disrupted.
The fund maintains a well-balanced exposure across market caps which has helped it benefit from the rally in the market over the past few years.
It currently has an AUM of Rs 90 bn.
A monthly SIP of Rs 10,000 over a 10-year period, meaning a total investment of Rs 1.2 m, in Nippon India Value Fund would have now grown to Rs 2.79 m.
This translates into an XIRR of 16.1%.
Its top stock holdings are HDFC Bank, SBI, Axis Bank, ICICI Bank, and NTPC.
It invested 56.8% in large caps, 19.6% in mid caps, and 20.6% in small caps.
#4 ICICI Pru Value Fund
Launched in August 2004, ICICI Pru Value Fund, earlier known as ICICI Pru Value Discovery Fund, has consistently shown strong long-term performance, which has helped it become the largest scheme in its category.
The fund’s strategy of avoiding momentum-driven investments and focusing on large-cap stocks helps lower risk and allows it to outperform the benchmark and majority of its peers.
It also benefits from the expertise of veteran fund manager, Sankaran Naren, who is well-known for his contrarian investment style and skill in identifying value.
It currently has an AUM of Rs 600 bn, making it the largest scheme in the category.
A monthly SIP of Rs 10,000 over a 10-year period, meaning a total investment of Rs 1.2 m, in ICICI Pru Value Fund would have now grown to Rs 2.74 m.
This translates into an XIRR of 15.8%.
Its top stock holdings are ICICI Bank, HDFC Bank, LIC of India, Reliance Industries, and Sun Pharma.
It invested 83.1% in large caps, 5.8% in mid caps, and 7.6% in small caps.
Conclusion
Value Funds invest in the growth potential of financially sound but undervalued stocks.
As these funds invest in undervalued stocks, they can potentially offer better margin of safety compared to growth-oriented funds.
However, since undervalued stocks tend to remain out of favour for a reasonable amount of time, the fund managers’ bets may take time to pay off.
Therefore, value funds may underperform in the short to medium term, particularly when market rallies are momentum-driven.
However, over the long term, value funds may generate returns in line with growth-oriented funds or even outperform them.
Value funds may form a part of the ‘core’ portfolio of investors who are aiming for diversification across investment styles, if the investment horizon is at least 5-7 years.
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