Value investing is a strategy involving buying investments on sale. In this regard, a value stock is an inexpensive stock. Simply put, the stock is quoting at a price that is at a deep discount to its intrinsic value, which represents the actual value of stocks in the market.
Value investing involves buying such undervalued stocks and holding them for the long term.
Mutual funds also offer investors exposure to value investing. A few of the large fund companies offer the option of both actively managed and passively managed (index funds) value funds.
Value funds are open-ended equity schemes, which adopt a value investment strategy. Such a type of fund invests in shares of companies and is traded at discounted rates.
The reason why an investor will zero in on such stocks is that while they may be undervalued due to temporary factors, however, such stocks provide higher returns in the long run. A high dividend yield can be expected from value funds.
Besides, with value investing an investor gets exposure to a portfolio that’s diversified wherein the assets allocations are mostly in growth-mutual fund schemes.
Also, considering that the value funds investment strategy involves looking at undervalued stocks, they are comparatively less vulnerable to market fluctuations.
In addition, value investing depends on a crucial sub principal which is called the margin of safety. For example, say a stock’s intrinsic value is Rs 300 and it is trading at Rs 200, then the remaining Rs100 provides investor confidence that they can look forward to making more profits than the rest. This is what’s called the margin of safety.
Value investing involves a lot of patience. Investors who are aware of macro trends and are looking at a long-term investment horizon should ideally opt for value funds.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.