In this article we cover
1) What is a Value Fund?
2) Things to Consider Before Investing in Value Funds.
3) Performance of Value Funds.
4) Taxation of Value Funds.
5) Let us now look at the Four best value funds in 2022.
Value investing and value mutual funds have stood the test of time. They have endured world wars, the great depression and the 2008 global financial crisis. I think this is one of the reasons why some of the world’s greatest investors prefer value investing. I’m talking about great investors like Warren Buffett, Charlie Munger, Benjamin Graham and countless others.
So, what is value investing all about? Why are investing legends fascinated with value funds? Especially when growth investing is much more rewarding? Why struggle to find undervalued companies when high growth companies are right there in front of our eyes?
The answer is simple. Value investing and value mutual funds are like a failsafe. They are like a parachute which will guide you to safety even amidst extreme markets conditions. Value investing is an art form. It is not like growth investing…where you look at sales and growth projections to make calculated bets.
Value investing involves determining the intrinsic value of a stock. And this is one of the toughest jobs in investing. Because you and I can have different opinions on a stock’s real value. Consider this … the share price of Reliance Industries on February 12, 2022 is Rs 2,376 per share. Its price to earnings is 29.20 against an industry PE of 13.90. So, some investors might think that Reliance Industries is an extremely overvalued stock.
But Reliance Industries has also managed to post 11% compounded sales growth in the last five years. While the five-year sales growth of its peer, Mangalore Refinery and Petrochemicals Ltd is (-) 4%. Suddenly, the stock doesn’t look as overvalued as it did in the last paragraph.
This is the catch and the beauty of value investing. Two individuals, studying the same data can have different views on the intrinsic value of a stock. This is why selecting the best value fund is a difficult job.
Now obviously, I don’t expect you to sit through millions of data points and guess the intrinsic value of each and every stock. Actually you don’t even need to do this. With value mutual funds, expert fund managers have already handpicked and invested in the best value stocks.
The only question that needs to be answered is this – ‘which are the best value funds in 2022?’ And this is precisely what we will be revealing in this article on best value funds in 2022. But before we do this, let us look at what is a value fund.
What is a Value Fund?
The Securities and Exchange Board of India (SEBI) defines value fund as –
An open-ended mutual fund which follows value investing philosophy. Value funds must invest a minimum 65% of its total assets in equity and equity related instruments of value stocks.
Now you must have heard about large, mid and small cap stocks. But what are value stocks? In simple terms, stocks that are trading below their intrinsic value are value stocks. So, basically these are fundamentally strong stocks which are undervalued by the stock market. So, the idea is to buy these beaten down undervalued stocks and hold them till the market realises their worth and rewards the investors.
Here are the most common value stocks owned by the best value funds in 2022.
Now there are some tenets of value investing that you must know before you invest in any of the best value funds –
Things to Consider Before Investing in Value Funds
Value mutual funds are not for the short-term :
Remember that the premise of value stocks is to invest in undervalued stocks and be rewarded when the market realises its true potential. But this will not happen overnight. The market will take its own sweet time to realise and reward undervalued stocks.
So, it is easy for you to get disappointed with a value fund’s 6-months or one year return. But this is the catch. If you stay invested in a value fund long enough, then you will be able to beat even large cap and multi cap funds.
Also do not invest in value funds if your investment horizon is less than five years. This again goes to the point that the journey from discovery to rewards for undervalued stocks is a long one.
Value mutual funds are not always low risk :
There is a common belief among investors that value funds means low risk. This is not always true. There is absolutely no restriction on value fund managers to stick to a particular market capitalisation. So, they can invest in large, mid and even small cap stocks. So, this idea that all value funds are low-risk is flawed and can land you in trouble.
For example, Indiabulls Value Discovery Fund and DSP Value Fund are both top performing value funds in 2022. But look at the stark difference between their portfolios –
DSP Value fund invests 26.34% in midcap stocks and 9.19% in small cap stocks. Whereas Indiabulls Value Fund invests only 9.27% in midcap stocks and nothing in small cap stocks. So, you can call Indiabulls Value Fund as a low-risk fund but DSP value fund is extremely risky. This is why investors must choose value funds cautiously.
Value funds are not immune from market downfalls
Another misconception regarding value funds is that they are immune from market falls. This is a fallacy. Yes, historically value funds have flared better than growth funds. But this does not mean that value funds do not fall when the overall market is down. The table below shows the performance of ICICI Prudential Value Discovery Fund and ICICI Prudential Bluechip Fund.
Sep-19 Dec-19 Mar-20 Mar-20 ICICI Prudential Value Discovery Fund -4.83 2.08 -25.60 25.96 ICICI Prudential Bluechip Fund -2.06 5.15 -28.55 19.75
Look at the quarter ending March 2020. Value funds have performed worse than large cap funds. So, investors shouldn’t always assume that value funds will not fall when the overall market is down. There can be some quarters where they do not perform. Just remember, value funds reward the patient investor.
Now that we are clear about value funds and their tenets, the big question is that are value funds worth investing? There is only one way to find out…Let us now look at the performance of value funds in India.
Performance of Value Funds
As you can see, the fund has given a return of 19% in a three-year period. Over the longer period of 10 years, value funds have generated 16% returns, which is not decent considering value funds take much lower risk than growth funds.
Taxation of Value Funds
Value funds are equity funds and the holding period from tax perspective is 12 months.
- If you sell your units before 12 months, you must pay a short term capital gains (STCG) tax of 15%.
- If you sell your units after one year, you must pay a 10% long term capital gains (LTCG) tax. But only if your overall capital gains exceed Rs 1 Lakh in a financial year.
- Dividends from value funds are taxed in investors’ hand as per applicable tax slab. If total dividends from the fund exceed Rs 5,000 then a 10% TDS will be charged.
Let us now look at the Four best value funds in 2022.
1: DSP Value Fund
DSP Value fund is the top performer in 2022 in the value fund category. The fund is a new entrant in the value fund space as it was launched in December 2020. It has given a return of 20.61% in the last one year.
The fund is a slightly aggressive value fund with 26.34% exposure to midcap and 9.19% to small cap stocks. The total AUM of the fund is Rs 565 crore as on 31st January 2022. The fund invests 87.80% in equity and 12.20% in cash. DSP Value Fund follows a blended investment strategy. It is bullish on the financial (29%), technology (17%) and energy sector (10%).
One of the key drivers of the fund’s superior performance in the last one year is its 7.55% exposure to Reliance Industries Ltd. Some of the key financials of the fund are as follows –
Launch Date 29th December 1998 Return since Inception 18.60% Assets 3,652 Expense Ratio 2.11% Turnover 14.41% Dividend Rs 1.52 Sharpe 0.79% Alpha 1.76% Exit Load For units in excess of 10% of the investment,1% will be charged for redemption within 365 days
2: Tata Equity PE Fund
Tata Equity PE Fund is one of the best performing value funds in 2022. It has generated a return of 18.12% in the last one year. The fund invests 70% of its assets in stocks having a trailing PE ratio less than BSE Sensex.
The fund has a decent AUM of Rs 5,035 crores as on 31st January 2022. It holds a compact portfolio of 37 stocks having a collective PE ratio of 21.47.
The fund has a decent mix of large cap (70.42%), mid cap (24.39%) and small cap stocks (5.19%). It is bullish on the financial sector with a 35% weightage against a category average of 25%. Its performance has benefitted from the rally in Reliance Industries (5.70%), ITC (5.70%) and ICICI Bank (9.45%). It also invests heavily in the following five sectors –
Some basic financial details of TATA Equity PE Fund are –
Launch Date 29th June 2004 Return since Inception 18.45% Assets 5,035 Expense Ratio 1.96% Turnover 43.19% Dividend 2.05 Sharpe 0.67% Exit Load For units in excess of 12% of the investment,1% will be charged for redemption within 365 days
3: UTI Value Opportunities Fund
UTI Value Opportunities Fund is a veteran in the value fund space. It was launched in July 2005 and has generated a return of 14.92% since launch. The fund has generated a return of 20.55% in the last one year and 20.84% in the last three years. The fund has also managed to generate an alpha of 2.40%.
The AUM of the fund is Rs 6,710 crore as on January 31, 2022. This is the second highest AUM in the value fund space. The fund invests in nearly 63 stocks with a PE ratio of 25.48. It invests 64.17% in large-cap, 29.17% in midcap and 6.66% in small cap stocks.
The fund is bullish on financial (28%), technology (11%) and automobile (11%) sector. The fund’s top three holdings include – ICICI Bank (8.82%), Infosys Ltd (8.15%) and HDFC Bank (7.97%).
Some basic financial details of UTI Value Opportunities Fund –
Launch Date 20th July 2005 Return since Inception 15.02% Assets 6,710 Expense Ratio 1.96% Turnover 14.0% Dividend 0.97 Sharpe 0.82% Alpha 2.40% Exit Load For units in excess of 10% of the investment,1% will be charged for redemption within 365 days
4: Indiabulls Value Fund
Indiabulls Value Fund is a lesser-known value fund with a paltry AUM of Rs 11 crores only. However, this hasn’t affected the fund’s performance much. It has generated a return of 19.89% in the last one year. The fund invests in a compact portfolio of 33 stocks with a combined PE ratio of 23.86.
The fund is comparatively less risky, with only 9.27% exposure to midcap stocks. It is majorly invested into large cap stocks with 90.74% exposure. The fund is bullish on financial (37%), technology (17%), and energy (12%) sectors.
The fund invests 24.46% of its total assets in Indiabulls Nifty 50 Exchange Traded Funds. It also invests heavily in ICICI Bank (8.44%) and Larsen & Toubro (5.95%). Some basic scheme details are as follows –
Launch Date 08 Sep 15 Return since Inception 8.91% Assets 11 Expense Ratio 1.29% Turnover - Dividend 0.62 Sharpe 0.62% Alpha -1.65% Exit Load 1% for redemption within 365 days
This concludes our list of the four best value funds in 2022. But as mentioned earlier, you should invest in value funds only if you are committed to staying invested in them for a minimum of five years.
If value funds sound like your cup of tea and you have the patience to let the tea leaves steep for the long term, then stop procrastinating. Simply open an investment account with RankMF and start investing in the best value mutual funds with just a few clicks.
The author is a Certified Financial Planner (CFP) with 5 years experience in Investment Advisory and Financial Planning. Her strength lies in simplifying complex financial concepts with real life stories and analogies. Her goal is to make common retail investors financially smart and independent., RankMF | Last Update 14 Mar 2022
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