What is a Value Fund?
It is a type of an equity mutual fund that primarily invests in stocks that are available at low prices but have the potential to move upwards.
Fund managers of value funds aim to identify and invest in stocks that are considered undervalued for a variety of reasons, which are trading below their true value, but demonstrate their potential to grow. . Once the market knows the true value of the stock, the share price rises. And, thus the fund will benefit from this value addition.
Fund managers may consider one or more valuation metrics to determine the intrinsic value of a company. Many other qualitative factors are also considered when determining the intrinsic value of a company, including business model, competitive position, management team, etc. If the company’s market value is less than its intrinsic value, it is considered ‘valued’. , These stocks are considered undervalued and have potential for future growth. The fund enjoys the flexibility to invest in stocks across sectors by market capitalization.
What makes the value fund worthwhile?
A value fund as it is understood is a
Fund
One who follows a value investing strategy and wants to invest in stocks that are considered
not evaluated properly
In price based on fundamental characteristics. The premise behind value investing is that there are some inherent inefficiencies in the market that cause specific companies to trade at levels below their true value for a variety of reasons. Value fund managers are skilled in identifying these market inefficiencies, thus profiting from the expected increase in share price.
Unlike value investing, growth investing focuses on companies with high growth potential that have
Income
They are expected to grow at an above-average rate compared to their industry or sector or the overall market.
Investors can consider investing in both value and growth funds with the aim of achieving diversification in the overall equity portfolio and benefiting from the growth potential over the long term. The percentage of allocation for each of these funds will depend on the individual’s ability and preference for risk, as well as market conditions.
What is tax treatment?
Mutual fund receipts include income distributions and/or capital gains at the time of redemption. Therefore, tax treatment involves two approaches. Investors are given to choose between options, i.e., Growth and Income Distribution cum Capital Withdrawal Scheme at the time of application
income distribution
Effective FY 20-21, Dividend Distribution Tax (DDT) has been abolished. However, income from mutual funds is now taxed at a marginal tax slab. Such income distributed by mutual funds also comes under the purview of Tax Deduction at Source (TDS). As per the latest tax reforms, TDS is deductible where income distribution income exceeds Rs 5,000 in a year at the rate of 10%.
capital gains
The difference between the redemption value and the acquisition cost is the profit you earn. The holding period determines the nature of these benefits. Where the investment in an equity fund is held for 12 months, the profit on redemption is short term capital gain. In other cases, where the holding period exceeds 12 months, it results in long-term capital gains. Short term capital gains are taxed at 15%. Whereas, long-term gains up to Rs 1 lakh received in a financial year are exempt from taxes and capital gains above Rs 1 lakh are taxable at 10% (plus applicable surcharges and cess, if any).
What is the ideal time horizon?
Value funds are a suitable option for investors with medium to long duration. It is better to stay in investment for at least 5 years. A Systematic Investment Plan (SIP)* can help in dealing with market volatility over time and will create a disciplined approach to investing.
(*SIP is a process of disciplined investment of a fixed amount in a specific mutual fund scheme for a regular period of time on a pre-determined date.)
Who should invest in Value Funds?
Value funds are suitable for investors who are looking for diversification in investment style over growth funds. Investors can also consider investing in value funds to build their core portfolio holdings and achieve long-term goals.
Disclaimer- An investor education initiative by UTI Mutual Fund.
Mutual fund investments are subject to market risks, read all the scheme related documents carefully.
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