Market crashes come without warning unless and until you are a pro investor who can predict every market move. Your portfolio takes a hit. Growth stocks tumble hard. But what if there was a way to soften this blow?
At this time, value funds come in handy—the steady anchors that keep your portfolio grounded when real storms hit. These funds hunt for hidden gems in the market. They buy those stocks that others ignore after thoroughly understanding their business. And these funds deliver when you need protection most. Let’s explore why value funds deserve a spot in your investment strategy, or you can say your portfolio.
Let’s start with understanding what value funds are. Continue reading to learn the ins and outs of value investing in detail.
What Are Value Funds?
Value funds invest in undervalued stocks. These are companies that are trading below their true worth. The market usually overlooks them for various reasons. Maybe because the sector fell out of favour, or perhaps quarterly results disappointed temporarily, or the company simply lacks media hype. There could be any reason.
Think of value investing like shopping during a sale. You spot quality brands or stocks at huge discounts. Smart investors grab these deals, but spotting the deal is critical. Value fund managers do the same.
Warren Buffett built his fortune using this approach. Benjamin Graham introduced the concept in 1949. His book “The Intelligent Investor” became the bible for value investors. Also, the strategy has stood the test of time.
How Value Funds Create Portfolio Stability?
Value funds act as shock absorbers in your portfolio. Here’s how they work their magic.
1- Lower Volatility
Undervalued stocks don’t swing wildly every day. Short-term traders ignore them. News channels rarely discuss them. This keeps their price movements stable. Eventually, if you own them, your portfolio faces less drama during market swings.
2- Better Downside Protection
When markets crash, value stocks fall less. Why? Because they already trade at low prices, and there’s limited room to drop further. This creates a safety cushion. Your losses stay smaller than growth-heavy portfolios.
3- Margin of Safety
Imagine a stock worth 500 rupees trading at 100 rupees. You buy it at 100. You have a 400-rupee cushion. This is your margin of safety. Even if the stock drops to 150, you’re still safe. This concept protects your capital during tough times.
The Portfolio Balancing Act
Most portfolios lean heavily toward growth stocks. Most of the time, tech companies dominate in the growth stocks category unless and until there is a probable recession about to hit America. Innovation stories capture attention. Everyone wants the next big winner. But this creates risk concentration.
Value funds protect portfolios in such scenarios and bring balance. They invest in different sectors. Banking, manufacturing, utilities—industries growth investors skip. This diversification spreads your risk. When tech crashes, your value holdings stay steady.
The strategy works like a see-saw. Growth stocks soar in bull markets. Value stocks shine during recoveries and market corrections. Together, they smooth your investment journey.
Why Value Stocks Lag Sometimes?
Value funds have underperformed recently. On the other hand, growth stocks delivered spectacular returns. The tech boom left value stocks behind. This frustrates many investors.
But this underperformance creates opportunity. Value stocks became cheaper. The gap between value and growth widened. History shows that his gap eventually closes. The rubber band snaps back.
Market cycles repeat themselves. Growth dominates, then fades. Value takes the lead during rotations. This led patient investors to reap the rewards.
Also Read:
Why should one choose to include value funds in their portfolio?
Value funds pursue dual goals. They aim for solid returns while making sure that the capital remains preserved. This conservative approach suits most investors.
Fund managers conduct deep research. They analyse company fundamentals. They take care of everything, ranging from balance sheets to cash flows to debt levels. They only buy after a thorough investigation.
This careful selection filters out risky bets. It helps in avoiding companies with shaky foundations, making sure that your money goes into stable businesses. These companies survive downturns and eventually emerge stronger.
Who Should Consider Value Funds?
Value funds suit specific investor profiles. Keep reading to know whether you belong to any particular type or not.
1- Long-Term Thinkers
In the modern world, where everything is available in minutes, patience as a virtue seems to be fading. But if you think you have patience, you can go with value funds. Results take time to materialise. The market slowly recognises undervalued stocks. This process spans years, not months. If you can wait five to seven years, value funds work well.
2- Risk-Conscious Investors
You want growth but fear big losses. Value funds offer a middle path. They provide reasonable returns with lower risk. This appeals to cautious investors.
3- Portfolio Diversifiers
You already own growth funds or tech stocks. Adding value funds helps in balancing your mix. You reduce concentration risk, and subsequently your portfolio becomes more resilient.
Some Practical Tips for Investing in Value Funds
Listed below are a few practical tips that you can keep in mind while investing in value funds:
1- Limit Your Allocation
Don’t put everything in value funds. Allocate just 15 to 20 per cent of your equity portfolio. This provides balance without overdoing it because you will still benefit from growth stocks or funds more in times of a bull run.
2- Use Systematic Investment Plans
Start small and invest regularly. SIPs average out your purchase price. They remove timing worries. You build your position gradually.
3- Check Track Records
Always look for experienced fund managers and check whether they’ve handled value investing through multiple cycles. Because they should understand when to hold and when to sell. Experience matters greatly here.
4- Monitor Performance Over Years
Don’t judge value funds quarterly. You should check three-year or five-year returns, as value investing needs longer timeframes. Usually, short-term numbers mislead investors.
The Value Advantage During Market Corrections
Market crashes test every portfolio. Value funds show their strength during these periods.
When growth stocks collapse, value stocks hold ground. Their low valuations limit downside. Investors seek safety in solid businesses. Money flows toward undervalued quality stocks.
This defensive nature proves invaluable. You sleep better during turbulent times. Your portfolio damage stays manageable. You maintain confidence in your strategy.
The Recovery Phase Opportunity
Markets eventually recover from crashes. Value stocks typically lead the rebound. Investors recognise bargains. Money floods into undervalued sectors.
Your value fund holdings appreciate quickly. They catch up with growth stocks. Sometimes they even outperform. This recovery boost makes the wait worthwhile.
Historical data support this pattern. Value stocks deliver strong returns during recovery phases. Patient investors capture these gains.
The Long-Term Wealth Building Approach
Building wealth requires two things. You need returns, yes. But you also need capital preservation. Because losing money will put you on the back foot.
Value funds prioritise both objectives. They aim for steady appreciation while avoiding catastrophic losses. This disciplined approach compounds wealth in the long term.
Think about it this way. A 50 per cent loss requires a 100 per cent gain to recover. Avoiding big losses keeps you ahead. Value funds help achieve this.
Making Value Funds Work for You
Success with value funds needs the right mindset. You have to ignore daily price movements. They don’t matter. Focus on business fundamentals. Trust the investment process and the fund managers. Remember why you invested in the first place.
All you have to do is stay committed during underperformance. This tests your patience the most. Everyone around you makes money. Your value fund lags behind. This happens regularly.
But giving up resets your timeline. You miss the eventual payoff. Successful value investors remain disciplined. They stick with the strategy through cycles.
Final Thoughts
Building a shock-proof portfolio requires smart diversification. Value funds provide crucial stability. They balance growth-heavy portfolios with ease. Also, they act as great protectors during market crashes.
The strategy isn’t just glamorous but also thoughtful. Value stocks don’t make headlines now and then. You won’t brag about them at parties. But they do something better consistently. They preserve and grow your wealth steadily.
Consider allocating only 15 to 20 per cent to value funds. Give them five to seven years to perform. Choose experienced fund managers. Invest through SIPs. Stay patient and disciplined.
Market storms will come. Your portfolio needs anchors. Value funds serve this purpose beautifully. They’re the real yet critical shock absorbers your financial plan deserves.
Follow Us:
