Should You Invest In Value Funds?

Some portion of your equity portfolio should be invested in these funds for the sake of style diversity

- Sudipta Mitu

Value-oriented funds have sappointed investors in recent times. Their category average return has been a meagre 1.02 per cent over the past one year and 3.55 per cent over the past three

years. However, their category average return over 10 years remains a respectable 11.14 per cent, which is one reason why investors should retain faith in this category despite its poor showing in recent years.

What are value funds?

Value fund managers purchase stocks they believe are currently priced at lower levels than they are worth. They are different from growth fund managers, who primarily invest in stocks that have high earnings growth potential. While value fund managers shy away from investing in stocks carrying high valuations, growth fund managers are prepared to pay a high price. The latter believe that the future earnings growth potential of these stocks justifies their lofty valuations.

Many stocks get beaten down when negative news hits their companies. Many investors exit such stocks in such times. Value fund managers use these opportunities to buy such stocks if they believe that the company will be able to overcome its difficulties.

The main risk in the value style of investing is, what is known as a value trap, which is the error of investing in a cheaply priced stock that is of poor quality. Such a stock is never able to overcome its difficulties. Its valuation keeps falling, causing losses to those who invested in it.

Different styles of value fund managers