What are Value Funds? - Meaning, Features & Benefits

As an investor, have you ever considered an investment option that allows you to invest at a discounted rate and add high-quality assets to your portfolio? If yes, then value funds are a credible solution for this.

With value funds, you invest in quality stocks trading below their intrinsic value. As the market corrects these undervaluations, the potential for long-term capital appreciation increases. In fact, value funds in India have delivered an impressive 27% average return over 3 years.

Read this blog and understand how they work, who should invest, risk factors and more.

Quick Synopsis

• These funds invest in undervalued stocks for the long term till their prices increase. 
• It is suitable for long-term investors looking for steady growth over time.
• As it deals in undervalued stocks, it involves the risk of a value trap and may not perform well during bearish markets.

Understanding the Value Funds

When you invest in a value fund, the fund manager identifies fundamentally strong companies whose stocks are currently undervalued but have high growth potential. These funds typically allocate at least 65% of the fund to such stocks.

Over time, as the market recognises its true value, these stocks tend to appreciate, leading to long-term capital gains. However, you should be mindful of some risks, such as value traps, where some undervalued stocks might not perform well even in the long term.

Who Should Invest in Value Funds?

Value funds may be well-suited for the following types of investors:

• If you are looking for steady growth over a quick profit, this type of fund is suitable for you.
• Risk-tolerant individuals who can handle potential value traps and market uncertainties.
• Fluctuations in the securities market are always common, and therefore, you must be comfortable dealing with short-term fluctuations.

Characteristics of Value Funds

Take note of the important characteristics of these funds:

• Have a Higher Return Potential: You can invest in these funds at a discounted rate, as a long-term investment, and earn solid returns as the prices of undervalued stocks rise. In fact, over the past 5 years, value funds have delivered impressive annual returns of around 31%, rewarding patient investors.
• Involves a Long-Term Investment Horizon: Another key feature of value funds is their ‘buy-and-hold’ strategy, where fund managers invest in undervalued stocks and patiently hold them until their prices rise, maximising potential gains upon sale.
• Helps Diversify Your Portfolio: When you invest in such funds, your fund manager allocates your investment across stocks from different industries and sectors. This helps to diversify your portfolio and reduce risks. 
• Less Volatility and Quality Investments: Compared to overvalued stocks, undervalued stocks carry relatively lower risk since they are already trading below their intrinsic value. This reduces the likelihood of further price decline while increasing the potential for upward growth.

How to Strategise Your Value Investments?

Here is how you can strategise your investments in undervalued stocks:

• Set clear financial goals and determine your investment horizon. Choose a value fund that aligns with your risk appetite and long-term objectives.
• Begin with a Systematic Investment Plan (SIP) starting as low as ₹100, or opt for a lump sum investment ranging from ₹1,000 to ₹5,000 or more, based on your comfort level.
• Look for funds with a solid performance track record, a sound investment strategy, a reasonable expense ratio, and consistent fund management. Expense ratios for value funds typically range from 1.5% to 2.5%

Risk Factors Involved in Value Funds Investments

Take note of the following risks involved in these investment funds:

• Value funds may lag during low-interest or high-growth market phases, where growth-oriented funds typically outperform. This can impact short-term returns.
• A major risk is falling into value traps, stocks that appear undervalued but fail to recover or grow. For example, in 2025, some value funds recorded negative returns of up to 18%, highlighting the potential downside, as per a report published in The Economic Times.
• Being a long-term investment option, some stocks might take a year to perform, and some may take even more time. Investors looking for steady growth might lose patience if such funds take more time to perform than expected.

A Few Important Tips to Note Before Value Investing

You should be mindful of the following pointers before investing in these funds:

• Analysing the past performance of a particular fund will help you determine whether it can deal with market volatility, provide returns and avoid a value trap.
• Returns can vary significantly year-on-year; for instance, Bandhan Value Fund posted a 31.56% 5-year return but only 0.99% over the last year.
• You should set a long investment horizon for value funds. It is recommended to keep your fund invested for at least 3 to 5 years. 
• Evaluate the fund manager’s expertise, investment approach, and how they navigate market downturns.
• Since value funds invest in less popular stocks, they are prone to short-term fluctuations. It is important to assess these risks carefully and ensure they align with your personal risk tolerance before investing.

Final Word

Value funds are excellent investment options if you are willing to keep investing for the long term and experience steady growth. These funds invest in undervalued company stocks that gradually gain value over time, resulting in profits.

Looking for more stable investment options? Stable Money offers secure Fixed and Recurring Deposit plans with attractive interest rates. 

Download the Stable Money app and start earning interest of up to 8.50%!