Invest in Value Mutual funds to gain in various market conditions
The concept of Value Funds is globally recognized strategy. It is still yet to get complete recognition in India. When you choose a mutual fund, you generally choose for growth mutual funds. However such funds would go with market condition. Do you want to invest in mutual fund scheme which goes with market condition but not with the similar pace or speed? It could be in upside or downside. Then you should invest in Value Mutual funds.
What are value Mutual funds?
Value funds are those which invest in growth oriented stocks. These are undervalued stocks which are not the favorite for investors. Value funds opt for stocks with low valuations, but which are expected to turn in few years. Value fund managers also look high dividend paying stocks as value stocks as they provide high financial stability.
Benefits of investing in Value Mutual Funds
1) Protection in downturn: These funds do not invest in growth stocks. Investors would have some expectations in growth stocks, hence during market downturn, they would get beaten up. However Value stocks are not favorite of investors, hence there are fewer chances that their prices fall. Value funds which invests in value stocks could see little downside due to this strategy.
2) Portfolio Diversification: It helps for an investor to do portfolio diversification. Investing in growth stocks may be good, but investing in growth oriented stocks would help for portfolio diversification as both would not perform in same way. E.g. if you invest in X mutual fund which is growth fund and Y mutual fund which is value fund. When market has grown by say 20%, your growth fund would have also grown by 20% and value fund would have grown by 15%. However let us assume that market has fallen by 20%, your X mutual fund has also fallen by 20%, but your Y mutual fund which is value fund has fallen only by 15%.
3) Globally accepted strategy: The value funds strategy is globally recognized and accepted strategy. These are also not new in India. There are a few mutual fund schemes like Templeton India Growth Fund or ICICI Pru discovery Fund or Templeton India income funds which are already running and tested in various market conditions.
Negative side of Value Mutual funds
1) May not perform well in bull runs: Like growth funds, these value funds may not perform in-line with Bull Run. Investors pays high price for growth stocks during Bull Run. Since value stocks are not investor favorite, they may give less importance. We can take a classic example. ICICI Pru discovery fund is a value fund. In 2007 when there was a bull run, mid-cap has grown by 80%; however ICICI Pru-discovery has grown only 40%. In similar way, subsequent year there was market downtrend where mid-cap stocks has fallen by 60%, however ICICI Pru discovery fund has fallen by 55%. This is a sample example on how value funds would behave different ways in various market conditions in comparison with benchmarks.
2) Takes longer time for recognition: The recognition to value stocks would take longer time, hence your appreciation would happen in long-run. If you are short term investor, do not invest in such value funds.
3) Fund Manager may go wrong: Few times, fund manager may be wrong in choosing a value stock. The stock may fall and may further dip. Finally fund manager have to book loss and finally exit out from such stocks.
Well, all this is fine, than what should be investor strategy?
Investing in Value mutual funds is good strategy which is yet to get full recognition in India. Many large cap funds are including value stocks in their portfolio. You can keep investing in large cap funds to diversify your portfolio. The other strategy could be investing 20% to 25% of your portfolio in such value mutual funds. Some of the value funds which can be looked are ICICI Pru discovery fund, Templeton India growth fund, Quantum Equity fund or blended funds (growth + value) like HDFC Mid-cap opportunities fund or FT India income fund.
Conclusion: If you are looking for a best mutual funds portfolio which should perform well in all market conditions, you should include value mutual funds as part of your portfolio.
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Value Mutual funds
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