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Best Value Funds in 2022 to Generate High Returns

Value funds have grown as a reliable way for investors to generate more than expected returns. These funds stand out because of their approach to carrying out superior returns. While most fund schemes in India focus on the growth approach where significant exposure is to emerging companies with high growth prospects, value funds work in contrast with growth investing.

What are value funds?

Value funds are basically equity-based funds. The idea behind this style of investment is to invest in those stocks of companies that are underpriced than their actual price at a given point in time in terms of net current assets, earnings, and sales but have the potential to generate substantial returns in the longer run. Value funds hold on to stocks for an extended period until the market conditions stabilize and realize long-term gains. These funds should not be confused with small-cap funds as both are different.

Best value funds in 2022 in India 

Some of the well-known value funds in India and their returns over the years are as follows:

Scheme Name
Direct plan - Growth option
AUM(Rs. crores)3 years(CAGR)5 years(CAGR)
ICICI Pru Value Discovery Fund23,526.8216.95%11.95%
HDFC Capital Builder Value Fund 5,215.589.54%8.80%
Nippon India Value Fund4,388.8213.22%10.82%
Aditya Birla SL Pure Value Fund4,082.937.29%3.16%
Indiabulls Value Fund9.8610.68%4.46%

Who should invest in value funds? 

Since value funds employ an aggressive approach that involves investing in undervalued stocks, the risk is relatively high. Although there is a safety margin (as securities get purchased at prices below their underlying value), things may turn out positively and negatively in the longer run. If you are a risk-averse investor, these funds may not be for you. Value funds are best suited for aggressive investors looking for better portfolio growth opportunities and who want to invest for a longer duration. Long duration plays a crucial role in this investment style as market conditions take time to stabilize, and so do the stocks to perform to the best of their potential. 

Taxation on gains from value funds 

Since value funds invest in equity and related instruments, the gains from these funds are subject to taxation. The tax rate on capital gains from these funds varies with the duration investors stay invested. Based on their holding period, investors generate Short-term capital gains (STCG) and Long-term capital gains (LTCG) and are taxed accordingly.

The capital gains from units held for less than one year are considered STCG, which get taxed at 15%. If the holding period is more than a year, the gains generated from units are called LTCG. The long-term capital gains of over Rs 1 lakh are taxed at 10% without indexation, whereas below 1 lakh are tax-free. Suppose your equity gains are 1.5 lakh in a financial year, so the 10% tax is applied only on Rs 50,000 while the remaining 1 lakh will be tax-free. 

If the funds offer any dividends, in that case, they will be added to investor income and taxed as per their income tax slab.

Compounding the effect of value funds with time 

With value investing, you get the advantage of compounding. When you generate returns from value stock and reinvest them, your profits increase with time. In short, your earnings start to generate returns for you. The beauty of compounding is that with the smallest amount, you grow exponentially with time. 

Risks associated with value funds 

Value funds carry high levels of risk attributed to their value-based investing strategy. The underlying stocks may remain at a lower price for a long time, and there is no certainty that they will perform well in the future. Besides, these are equity-based funds and are vulnerable to various risks related to market volatility and concentration. Hence, investors should invest in these funds only if they have a high risk-bearing capacity. 

Return potential to value funds 

Value funds offer a better risk-reward proposition. However, returns from these funds are more apparent in the longer term. Since these funds invest in undervalued stocks, they take a lot of time to grow and generate returns. These funds are also inconsistent, and there may be a lot of extended bouts of underperformance. But when value funds do catch up with their upswing, they outperform many fund schemes out there in the market. If you are willing to invest your time, value funds can help you best diversify your portfolio. Make sure you use value funds to complement your existing funds. That is because the Indian market is predominantly growth-based, where growth stocks have more potential to deliver healthy returns.

Advantages of value funds

With value funds, an investor can enjoy a lot of advantages apart from generating good returns.

  • Anyone can invest: One of the best things about value investing is that it's accessible to anyone who is willing to invest their time & patience. These two factors are essential for becoming a successful value investor. The value investment strategy is about surpassing short-term market fluctuations and getting the benefits of long-term returns.
  • Portfolio Diversification: Value funds invest in various undervalued stocks across different industries. By investing in these funds, investors get exposure to securities that have the potential to appreciate in the long run. At the same time, they get an opportunity to invest in a well-balanced and diversified investment portfolio.
  • Less risk and volatility: Since value funds are intended for long-term investments, they easily avoid the daily whirlwind of market price fluctuations. These funds invest in undervalued stocks, so they usually don’t show significant movement daily. Therefore, the funds are relatively less volatile. Value funds also free you from various trading fees associated with short-term stock holdings.
  • Quality stocks: In value funds, investors get to invest in stocks that are trading for less than their original value but are backed by financially strong companies having tremendous future growth potential. As a result, they effectively earn high returns over the long term.
  • Safety margin: Value mutual funds buy stocks by keeping the margin of safety in consideration which is the difference between the stock's actual value and its current market price. Let's take an example to understand this. Suppose the fundamentals of the stock suggest that it should have a price of Rs 400. However, the stock is currently trading at Rs 100. So if the value fund buys the stock at Rs 100, it has a safety margin of Rs 300 (Rs 400-100). This margin helps increase the chances of getting higher profits in the future. 

Why should you invest in value funds? 

Value funds can be a great way to get exposure to quality stocks across different market caps at a reasonable investment amount. This investment style is a good portfolio diversifier due to better safety margins. However, they can undergo periods of underperformance, so a longer investment duration is required to mitigate the volatility and other risks. If you have a long investment horizon, say at least five years, you can make these funds a part of your portfolio. Make sure you have a good mix of both growth and value style funds that will help you favorable returns across market phases and cycles. You can invest in value funds through a Systematic Investment Plan (SIP) to tackle market volatility over time.

Conclusion

While value funds can prove to be the most lucrative, they need some strong strategy and research to offer solid portfolio returns. If you are planning to invest in these funds, it's also crucial for you to get a better understanding of the approach of value funds so you can make the most of this long-term investment. 

FAQs

Do you have further queries related to value funds? We have got you covered with this FAQ section.

  1. How do value funds and growth funds different?
    • Ans: Growth funds invest in growing companies, whereas value funds invest in companies that are underpriced but have the potential to grow in the long run. Growth funds are more expensive and risky than value funds.
  2. When should you invest in value funds?
    • Ans: Value markets outperform during bear markets and economic recessions, and it's the best time to invest in them.
  3. What is the best way to invest in value funds?
    • Ans: You can invest in value funds through a SIP. It will allow you to tackle market volatility over time.
  4. How to choose the best value funds? 
    • Ans: The choice of funds will depend on various factors such as the fund manager's performance, historical returns, expense ratio, investment horizon, investment objective, etc. Investors must analyze every aspect before selecting any value fund. You can also seek advice from professional financial advisors from Glide Invest and make your task easier. 
  5. How to invest in value funds? 
    • Ans: You can directly visit the AMC website and select your preferred fund. Else, you can take assistance from a broker or intermediary platform such as Glide invest and invest in value funds through SIP or lump sum.

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