Why it makes sense to invest in a value fund

The Nifty 50 touched the 13,000 mark recently. It has risen about 70 per cent from the low it had touched this year in the last week of March.

- Sudipta Mitu

Many investors are now beginning to worry that after this steep run-up, the markets could see a correction. According to experts, one option investors can exercise in this environment, where valuations have moved into the expensive zone, is invest in value funds.

Advantages of value funds

One reason an investor should invest in value funds is that they provide style diversification to the portfolio. Most of the diversified equity funds that one has are growth-oriented funds. These funds tend to be hit hard when a bull run ends and stock prices correct sharply.

Value funds, on the other hand, invest in stocks where there is a margin of safety. In other words, the intrinsic value of the stock, as calculated by the fund manager or his team of analysts, is lower than its market price. The valuations of these stocks hence tend to be lower than that of the frontline market indices. The valuation of a value fund’s portfolio also, therefore, tends to be lower. Since value funds invest in more conservatively valued stocks, they are also hit less hard than their growth peers when the markets correct.

Why invest now?

According to experts, this is a particularly good time for investing in value stocks. The market rally this year has been driven by select mega cap stocks. In other parts of the market, many strong companies are still available at attractive valuations. Funds that invest in such undervalued stocks hold the potential to outperform.