As Sebi has now recognized Value Funds as a distinct equity category, we should be aware of caveats while including them in our portfolio:-
1. Value funds comprise of undervalued stocks, mostly characterized by lower PBV & PE ratios or high dividend yields, with lesser immediate expectations, but with potential to deliver superior long-term returns.
2. The risk in selecting such stocks by the fund manager is that if the entire market becomes overvalued, a selected stock may appear inexpensive, even though it is not.
3. A "value trap" risk also exists when the fund manager selects stocks from those that pay high dividends, as a sign of financial stability, which he believes to be good valuation picks, but their prices may continue to drift lower, with anticipated turnover never happening, eventually forcing him to bail out at a loss.
4. Value funds also tend to underperform in rising markets, since they don’t invest in high-growth and high-valuation stocks, whereas investors are willing to pay a premium for future growth at that time.
5. Value funds require investors' patience, with time in hand, during which all norms should be properly enforced by companies of those stocks, so that their "hidden" value could be properly uncovered.
1. Value funds comprise of undervalued stocks, mostly characterized by lower PBV & PE ratios or high dividend yields, with lesser immediate expectations, but with potential to deliver superior long-term returns.
2. The risk in selecting such stocks by the fund manager is that if the entire market becomes overvalued, a selected stock may appear inexpensive, even though it is not.
3. A "value trap" risk also exists when the fund manager selects stocks from those that pay high dividends, as a sign of financial stability, which he believes to be good valuation picks, but their prices may continue to drift lower, with anticipated turnover never happening, eventually forcing him to bail out at a loss.
4. Value funds also tend to underperform in rising markets, since they don’t invest in high-growth and high-valuation stocks, whereas investors are willing to pay a premium for future growth at that time.
5. Value funds require investors' patience, with time in hand, during which all norms should be properly enforced by companies of those stocks, so that their "hidden" value could be properly uncovered.