Are you looking at an investment that grows steadily over time? Do you want to buy stocks trading at a significant discount to their intrinsic value? You may consider investing in value funds that follow a value investment strategy. It looks for stocks of companies with solid fundamentals that are currently trading at a discount. However, these companies have the potential to grow over time. Should you invest in NFO of value funds?
What are NFOs of value funds?
You have value funds as open-ended equity funds that follow a value investment strategy. It is an approach where the fund manager picks up stocks of companies with sound fundamentals that are currently trading below their intrinsic value. You have these funds trading below their actual value as investors, and the market at large hasn’t realised their real potential.
You may invest in value funds through the New Fund Offer or NFO. You have mutual fund houses launching new mutual fund schemes, including value funds through the NFO. The mutual fund house launching the NFO in value funds collects money from subscribers to invest in shares and construct the portfolio according to the value investment strategy.
You must invest in value funds to achieve your investment objectives only if you have higher risk tolerance. It invests mainly in stocks of undervalued companies that may take some time to realise a higher return. You may avoid the investment if this is your first time in the stock market.
Should you invest in NFO of value funds?
You may invest in the NFO of a value fund only if it offers something different from other value funds. For example, the value fund launched through NFO does not have a track record to gauge its performance. Moreover, it may have a higher expense ratio as mutual fund houses spend a lot of money advertising their NFOs.
You have many value funds that focus solely on picking companies at a lower valuation. However, you could consider a value fund that focuses on companies with a lower valuation and checks for potential triggers that can lift these companies’ shares.
You must check the portfolio of value funds for companies that carry massive debt on their balance sheet. It helps avoid value traps where investors select companies that have low valuations without focusing on their fundamentals. You have many investors falling into the value trap as these companies never recover even over the long run, thereby eroding shareholders wealth.
Does investment style matter in value funds?
You have many value funds following the traditional value investing approach while picking stocks for their portfolio. It involves focusing on lower valuations, and companies can take years to turn around as they go through a long phase of underperformance. However, value funds that stick to the traditional approach may see a better performance during the initial stages of an economic recovery.
You must follow a wait and watch approach with a value fund that tracks a different investment style than the traditional approach. It helps to examine the performance of the value fund across various market cycles for a better understanding of the investment style.
You must opt for a value fund that charges a lower expense ratio. It helps increase your take-home returns over some time. Moreover, you must check if the fund retains its portfolio holdings over a more extended period.
You must check the investing style of the value fund before putting money through the NFO. It helps if you study the performance of a value fund across market cycles over some time. In a nutshell, you could invest in the NFO of value funds following a different approach to the traditional investment style only if you understand the concept.
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