Value for money

A value-oriented fund can help your investment grow over a long time

Anand V. Nath Anand V. Nath

THE PAST few months have seen unparalleled volatility in the equity markets. In India, the benchmark indices lost almost 40 per cent of their value from mid-January to mid-March. There has also been a sharp upward movement for a few days, thereby limiting the correction.

Such situations have been making equity investors anxious, as no one actually knows to what extent the markets can fall, or to what extent they can rise. Having said that, buying when the market is at low points is among the top strategies of seasoned investors.

The question is, can an average retail investor make such decisions? Fear of losing precious savings usually prevents retail investors from taking such decisions. There is also the inability to determine what asset or company stock is a good buy when its price is falling. To address such gaps, asset management companies have come up with funds that follow the strategy of unlocking value in different assets or companies.

What are value funds?

Value funds are a type of mutual funds allowed under the equity mutual funds category. In a value fund, the fund managers are allowed to follow the value investment strategy with only one limitation, which is that the fund should have at least 65 per cent of its assets invested in equity and equity related instruments. This also means that the fund can take advantage of any opportunity arising in the equity market in any sector or company irrespective of the stock being a small-cap, mid-cap or large-cap one.

How do the funds and their managers spot value?

It appears quite simple when we hear an expert says that one should buy when the markets are low. In practice, there could be several variables at play when a stock price falls. The analysis can become even more difficult if the fall is sharp and it continues for a long period. Not every falling stock could be a value stock. It is possible that the stock in question is genuinely not worth the trading price. The art and science of separating the wheat from the chaff is what makes some of these value-oriented funds stand apart.

A good value-oriented fund would have a well-defined and clear strategy in place to identity such value stocks. It is also possible that such funds have a lower or no exposure to otherwise popular stocks, and have a good amount of exposure to not very popular names. At the same time, a well-strategised value fund would not hesitate to change its position on a particular stock. Moreover, a good fund management team would not just look at the broad market sentiment around a stock, but would pay attention to outliers and special situations for the stocks in the portfolio.

The ICICI Prudential Value Discovery Fund is among the oldest and largest in its category. With a track record of almost 15 years, it has delivered an average SIP return of 19 per cent, if we look at the five-year rolling returns of a monthly SIP in the fund between 2005 and 2015. The time period is important because it saw the entire 2008 global financial crisis unfold and then also the recovery that took place later. In the same 10-year period, the fund’s five-year rolling return was more than 12 per cent, over 80 per cent of the time.

If you have ever thought about how financial experts spot value and would like to take benefit from the expertise, this could be a suitable fund for you. At the same time, this fund can also be beneficial to those who intend to gain from the growth opportunities through equities over a long term.

The author is an expert with Amogha Financial Services.