What is a Value Fund? – Meaning, Benefits & How They Work

Investing is one of the best ways to grow your money in 2025. However, there are a lot of different types of investing. Have you ever thought about how some investors always seem to invest in the stocks that are underpriced today, but always increase in value in the future? This type of investing is called value investing. It is a type of investing where you invest in stocks that are undervalued and discounted today but have huge growth potential and can give you a lot of return on your investment.

Whether you are an investor who is starting out or someone who wants to diversify their investments, understanding how value funds operate can help you in making better investment decisions. This blog will discuss everything you need to know about what a value fund is, what the benefits of investing in it are, and how to choose the best value fund.

What Is a Value Fund?

A value fund is an investment fund or mutual fund that works on the principle of value investing. In this type of investing, you purchase the shares that are undervalued in the market today but have very solid fundamentals and can grow a lot in the future. Most shares of value funds are less than their actual value due to short-term setbacks or investor ignorance. These funds are ideal for investors who want long-term investment plans.

Value investing funds are becoming more and more popular in India, particularly among people who want long-term growth but don't want to take huge risks. Value funds generally invest in established companies that are priced at a discount compared to their true worth.

How Do Value Funds Work

Value funds are handled by skilled fund managers who make use of careful research and analysis to spot undervalued stocks. They consider different factors such as:

• Price-to-earnings (P/E) ratio
• Price-to-book (P/B) ratio
• Dividend yield
• Cash flow
• Company fundamentals and business model

Once the stocks are identified, the fund manager buys them for the long term. The hope is that eventually, the market will see the true value of such stocks and the price will increase to give returns to the investor.

Benefits of Value Fund Investment

Investing in value funds is one of the most underrated types of investing in India. Still, here are some of the main benefits of investing in value funds:

1. Generation of Wealth in the Long Run

   Value funds are not meant to be invested in for the short term. They are only for long-term investors who have the patience to get their investments to profit. As value funds invest in companies that are undervalued but fundamentally strong, these stocks often grow in value only after they reach their true market potential after a couple of years. So, you should invest only if you can keep your money invested for 5 years or more.

2. Less Volatility = Less Stress

   In contrast to sector or aggressive funds, value funds are less volatile as markets shift. Why? They invest in businesses that already have solid earnings, stable balance sheets, and tested business models. Even when no fund can escape market declines, value funds decline less and rebound faster.

3. Lower Downside Risk

   Value investing funds in India always invest in companies that are already undervalued or underpriced; hence, there's very little margin for error or loss. Since you already bought the stock at a discounted price, you'll be less likely to lose money. It is one of the safest types of investing. If the market drops, your investment might still hold strong or bounce back quicker because it was already bought at a discounted price.

4. Opportunity to Earn Dividends

   Most value stocks are those of mature companies that distribute regular dividends. So aside from capital appreciation, you also have the benefit of getting dividend returns. That is particularly helpful for conservative investors or retirees who need constant income without having to disinvest.

5. Suitable for Goal-Based Investing

   Saving for a goal 5-10 years from now, like your marriage, your dream car or your retirement value funds, can make your dreams come true. They might not turn you into a millionaire overnight, but they will definitely create wealth brick by brick if you are thinking long-term and are regular.

6. Professional Management

   You don't have to pick undervalued stocks yourself. That's the beauty of value funds; they are actively managed by expert fund managers who do the research and pick quality stocks on your behalf. So even if you're not a stock market pro, you're still investing like one.

Why Are Value Investing Funds in India Becoming So Popular?

Over the last decade, value investing funds in India have seen a rise in numbers. Investors are increasingly becoming aware of fundamentals alongside the long-term returns rather than being trend-driven by the market.

Some of India's best value funds have always delivered reasonable returns by adhering to their very basic philosophy: buy low, hold, and wait for the market to recover.

Are Stable Value Funds a Good Investment?

This is a very common question, particularly for conservative investors. Stable value funds provide capital preservation and ongoing returns. Even though they are not very common in India's mutual fund industry, they are excellent low-volatility and periodic-income investment vehicles.

Value funds focus on fundamentals and stability and offer well-balanced returns with less susceptibility to risk. Hence, they are one of the best long-term investment plans for stable long-term growth.

When Should You Invest in a Value Fund?

Although value funds best suit long-term wealth generation, timing also plays a significant role. The following are certain situations where an investment in a value fund makes sense:

• At market decline, when quality stocks are selling at affordable prices.
• When stocks are overpriced in the markets, to balance high-risk investments.
• If a risk-averse investor wants long-term returns.
• In portfolio diversification with a conservative investment strategy.

If you are not sure when to invest, then invest your value fund on the basis of your long-term investment plan to achieve your financial goal.

ULIP and Value Funds - A Strategic Investment Option

If you're an investor seeking investment as well as insurance, ULIP Plans (Unit Linked Insurance Plans) are one of the best options. They can help you invest in value-based funds on the equity side. This gives you the twin advantage of life cover and market-linked returns.

If you don't know the ULIP meaning, then you should understand it and see how it harnesses mutual funds and insurance in one comprehensive plan. It gives you the flexibility of a value fund along with the creation of long-term wealth.

Value Funds vs. Growth Funds

Let’s simplify the difference:

If you're someone who prefers slow and steady over fast and risky, value funds might be your best bet.

Real-Life Scenario: Value Funds in Action

Let's say that you invested ₹10,000 in a value fund that had undervalued shares of a car company. When you bought it, it was being sold at ₹100 due to some short-term regulatory issues.

However, the fund manager who helped you invest in that fund was positive that the company's fundamentals are solid and will give you great returns down the line. One year later, the market corrected, the company fixed its problems, and the stock price went up to ₹150. That's a return of 50%, simply by believing in the fundamentals and waiting.

This is the very essence of the philosophy of value investing: patience pays.

How to Select the Best Value Fund?

Picking the best value fund doesn't have to be confusing. Here are some expert tips to pick the one that can give you the most returns:

1. Think About Past Performance (But Don't Make It An Obsession)

   Look at how the fund performed on various time frames, like 3 years, 5 years, and even 10 years, if they exist. Historical performance does not always forecast future yield, but repeated long-term returns imply that something is working within the fund strategy. Look at how it did in bear markets: did it trend with the market or break down?

2. Assess the Fund Manager's Performance Record over the Years

   A fund is only as good as the manager who runs it. Get a sense of how long the fund manager has been with the fund and the types of decisions he's made in the past. Veteran value-investing managers place more discipline on the portfolio.

3. Expense Ratio – The Hidden Cost

   All the funds charge a tiny fee for handling your money, known as the expense ratio. The lower it is, the greater percentage of returns you retain. Although value funds are generally actively managed (so the fee can be a tad higher), ensure it's reasonable and justified by performance.

4. Check the Portfolio Holdings

   Analyse the fund's top 10 holdings. Are they industry leaders, sound financially, and reasonably priced? The fund should invest in businesses that are genuinely undervalued based on the fundamentals, and not because they are cheap.

5. Be Aware of the Risk Level

   Even value funds come with market risks. However, compared to aggressive growth or small-cap funds, the risk is lower. If you're someone who doesn't like market drama or checking your investment every day, value funds offer a smoother ride.

6. Asset Under Management (AUM) Size

   A big AUM is a sign of investor confidence and stability, but very large AUMs will also discourage swift action on the part of managers. It's all about balance. Watch out for funds that are neither bloated nor undersized.

7. Exit Load and Lock-In Period

   Some value funds charge a penalty if you withdraw earlier than expected, typically 1% if withdrawn in 1 year. Be certain to research this before investing, particularly if you are unsure of your cash flow requirements.

Tax Effects of Value Funds

Value funds will be taxed the same as any other equity mutual fund:

• If you hold them for a term shorter than 1 year, you will need to pay short-term capital gains tax at 15%.
• If it is held for over 1 year, long-term capital gains above ₹1 lakh are subject to a 10% tax.

Final Words

If you're looking for a smart and stable way to build wealth over time, value funds are the way to go. They focus on buying high-quality companies at a discount and give their investments time to grow as the market corrects itself. Value investing doesn't rely on market fads to invest money; it is based on thorough research. If you are charting your financial future, saving for your child's education, or building towards a dream retirement, considering a value fund can give you peace of mind and stable returns.

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