The basic idea of value mutual funds is value investing, which was developed by Benjamin Graham and employed further by Warren Buffet. The basic approach of value investing is investing in a stock that is considered undervalued in the market and waiting for a long time.
When these funds reach good market value, investors can make their returns on the investment. However, it takes time. This blog offers insight into the value of mutual funds and why they take the test of your patience.
What are Value Mutual Funds?
Value mutual funds are a specific type of equity mutual funds that mainly invest in stocks that are believed to be underpriced by the stock market. Fund managers of value mutual funds usually look for stocks that are undervalued or stocks selling at a lower price than their worth estimated through financial analysis.
These funds invest in companies that have strong fundamentals, stable and attractive earnings, and good dividend interest but are not popular with investors at the current moment.
According to SEBI, Value Mutual Funds can be defined as an equity-oriented scheme that follows the concept of value investing. This 65% investment can be made across market capitalization – large-cap, mid-cap, and small-cap stocks.
The balance of 35% may be invested in cash or any other debt securities. Value Funds generally invest 15%-20% of the corpus in cash as Value Funds are prone to redemption pressures in case of market meltdown. Since value funds are invested across market capitalization, they have different risks.
Why Value Mutual Funds Test Patience?
Value mutual funds are often considered the real test of patience in investing as they require long investment horizons to yield competitive returns to investors on their investments. Here is why:
- Long-Term Horizon: Value mutual funds are not for the quick goal but for the long-term investment goal. Value mutual fund investors should remain committed to their investments and hold their stakes for a long time, even during periods of market volatility or underperformance.
- Market Cycles: Value mutual funds generally do well in the long run, but during some market cycles, they may perform poorly for a long period. During these downturns, patience is essential because it enables investors to make money from the eventual rebound.
- Contrarian Approach: Value investors frequently choose to invest in companies that are currently out of popularity or experiencing brief setbacks by going against the majority of market trends. This contrarian strategy demands patience and confidence to survive temporary volatility and stick to the investment idea.
- Reversion to the Mean: The concept of mean reversion suggests that undervalued securities would eventually return to their underlying value, which is the fundamental concept of value investing. Investors have to stay patient when they wait for the market to establish the true value of their investments.
- Psychological Challenge: As a strategy, value investing is not easy on the mind. Investors need Patience to not be influenced by short-term fluctuations in the stock market and any adverse information about the companies in the fund. Investors have to avoid making hasty decisions that can affect their investments due to market volatility.
- Waiting for Catalysts: Value mutual funds buy stocks in companies that are experiencing short-term difficulties or are out of favor in the stock market. Investors have to wait patiently for a catalyst that will unlock the true value of these stocks by changing the management, a new product launch, or an entire turnaround.
To Wrap Up
Value mutual funds are indeed the real test of investors’ patience. They call for patience, persistence, and a long-term view from the investors in the light of risk and volatility. For investors having a long-term goal, value mutual funds are a suitable choice. To invest in mutual funds, open an account with Dhan.
