Value based fund is the concept to invest in funds that are undervalued. The reasons why value funds are undervalued could be due to temporary issues and have a potential to earn higher returns at par to once valuation is at par. The focus is to locate stocks that are undervalued and have not gone on to realize their true worth. There are some definite benefits of investing in value funds as follows
- They are known to diversify your portfolio. This rates to be a good strategy fit as they provide maximum amount of funds due to being growth oriented
- A higher degree of safety is provided as most of the investment takes place in undervalued stocks. For this reason chances of loss is restricted
- They work out to be less vulnerable as they end up investing in stocks whose expectations levels are not high
- They have a sustained capacity of generating higher degree of cash flow in the long run
- Better reward and risk profile is provided in an undervalued of volatile market.
Why investing in value funds seem to be a good idea?
To start off the main challenge of investing in value funds is to figure out their fair value that works out to be a science and art. For a routine investor this seems to be easy but for a new investor the path can prove to be tedious. At the same time an investor can make an investment as per their investment goals and horizons.
This fund operates on the principle of investing. At this juncture the fund manager tries to choose funds that are not evaluated on the basis of its fair value or it might be even available at a discounted price. The stocks are valued as per value based and even growth based. In case of growth stocks an investor is willing to pay an additional premium as the company witnesses a higher potential for growth. In the longer term, value based funds do the trick. A value based fund manager goes on to purchase funds in the market that are undervalued. They feel that it has the potential for appreciation, but this is ignored by a day to day investor. In order to choose such type of funds the fund manager incorporates certain strategies that are trading below their desired level due to market infancies. In order to arrive at the fair value of a fund managers go on to evaluate the cash flow of an organization that poses to be a challenging affair. Because of their superior track record and reasonable degree of experience in this domain to their customers they can go on to provide reasonable returns in the long run.
Of among all the equity investment strategies, investing in value funds seems to be a better bet. Yes there is a certain degree of risk, but it is covered by the benefits of such funds. For an investor who has a long time horizon of 7 to 8 years these funds seem ideal.