Reviewed by Jan 05, 2021| Updated on
A value fund follows a policy that focuses on investing in stocks based on fundamental characteristics that are undervalued in quality. Quality fund managers are looking for shares that are valued below their actual value for different reasons.
The premise behind a value investment strategy is that the share price will increase after the market realises the actual value of these stocks and the value fund investor will gain from this increase. Value stocks are often well-established firms offering dividend payments to investors.
Value funds and value investing are often synonymous with strategies developed by Warren Buffett and Benjamin Graham, the notable value investors. Value managers choose value fund stocks depending on the fundamental characteristics of the intrinsic value of a stock.
Value funds are typically utilised as allocations for long-term investments that can grow steadily over time. Thus, investment in the value fund is often linked to investment due to diligence and patience.
The idea behind value investing is that for various reasons, the market has some inherent inefficiencies that allow particular firms to sell at rates below their actual value. Value fund managers are able to identify inefficiencies in these markets.
Theoretically, once these inefficiencies are corrected by the market, the value investor will gain from a share price increase. Quality stocks are also often correlated with dividend payments as they are usually well-established businesses with dedicated dividend distribution programs.
Value funds offer a reliable investment opportunity by investing in undervalued stocks. Underestimated stocks do not look as exciting as growth stocks on the basis of sheer results. Value stocks, however, have a high potential for growth. The fund managers expect to earn substantial returns from these stocks as their interest is recognised by the market by holding these stocks for a long time.