As you might know, there are different types of strategies when it comes to mutual fund investing. One of them, which is quite popular, is the value style of investing. However, investing in value mutual funds may not be an appropriate investment choice for everyone. So, let’s deep dive into this and figure out the reasoning behind it.

But first, let’s understand the meaning of value mutual funds. A value fund is an investment option that concentrates on buying stocks, which have huge future potential. Quality fund managers search for shares that are undervalued.

A value fund investor stands to earn from a rise in share price when the market recognises the true worth of these businesses. This approach has been majorly popularised by iconic investors like Warren Buffett. 

How have value funds performed?

About 85% of value funds have underperformed in past five years. If you take the period as about 10 years, you will be able to see a few funds offering decent returns in double digits. But this performance is coming after several years. Hence, it’s tough to make any decision based on past performance as it could just be an anomaly.

Now these returns can seem a little surprising. Based on the principle of value investing, they should have been able to generate greater returns over a long period by identifying undervalued stocks.

However, that has not been the case.

Also Read: Flexi-Cap Fund vs Multi-Cap Funds: Which is Better for You?

Disadvantages of value funds

There are quite a few reasons behind the underperformance of value funds:

Old Investing Style

Value Funds are not equipped to deliver immediate returns in the coming future. Instead, they focus on preventing the downside, thus, it may compromise your chances of higher returns.

Core Market Issues

You must have heard a lot of people saying “This stock is overvalued” in past 2-3 years. So, when a company’s stock is becoming more expensive but there is no actual business growth, in such cases value investing doesn’t work.

Reliance on a Single Factor 

In value funds, the most amount of dependence is on the fund manager’s ability to pick undervalued stock more than anything else. Hence, if the fund manager fails to pick the right company, it could affect returns.

Conclusion

Investing in value funds may not be for everyone. But if this is a strategy that pleases you, you can go ahead with it. However, if you are willing to take a bet on these funds then allocating more than 10-20% of your equity portfolio might prove to be riskier. If you are someone who has been investing in value mutual funds then make sure to review them at regular intervals.

Disclaimer: The above content is for informational purposes only. You should consult a SEBI-registered Investment Advisor before investing in mutual funds.