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Best value fund is a class of equity mutual funds whose portfolio is constituted by adopting a value investing strategy to generate income in the form of capital gains in the long run by investing in securities of companies whose stock price is undervalued. We have covered the following in this article:
Best Value funds are equity funds that follow the principle of benefitting by investing in equities of companies whose shares are currently trading at a discount or undervalued but have the potential to appreciate in the long run due to the strong fundamentals. These funds are an excellent investment option to achieve long-term financial goals.
The fund manager and his team of experts and analysts research the markets and choose to invest in only those stocks that are undervalued and are expected to do well in the coming days. Best value funds try to catch the securities at the best price and hold on to them for an extended period of time to realise long-term gains.
The table below shows the top-performing value funds on the basis of the past 5-year and 3-year performance:
Since value funds are a class of aggressive equity funds, it may not be suitable to risk-averse investors or those not willing to take any risk. These funds are best suited for those investors with an aggressive approach towards investing. Investors should essentially stay invested for a long duration to realise stable and significant gains. Having a long-term investment horizon will help investors mitigate market volatility and other associated risks to a greater extent.
Since value funds are a class of equity mutual funds, they are essentially taxed like any other equity fund. The dividend offered by these funds, if any, are added to your overall income and taxed as per the income tax slab you fall under. The rate of taxation of capital gains depends on the holding period. Short-term capital gains are realised on selling your fund units within a holding period of one year.
These gains are taxed at a flat rate of 15%, regardless of your income tax slab rate. Long-term capital gains of up to Rs 1 lakh, realised on redeeming your units after one year, are made tax-free. Gains above this limit are taxed at 10% and there is no benefit of indexation provided.
Since value funds adopt the value investing strategy, they essentially carry high levels of risk, making it suitable only for those investors willing to take some risk. The underlying securities might remain on the lower price levels for an extended period of time, and it is not guaranteed that the price levels of these securities will move up.
The fund manager might be forced to sell the underlying securities at a loss due to the prolonged underperformance. Therefore, these funds are suitable only for those willing to stay invested for a period of at least five years. This will give the fund manager and assets much needed time to tackle the various associated risks. Other than this, like any other equity fund, even the best value funds are always impacted by market risk, volatility, and concentration risk.
Since value funds possess considerable risk, investors should be mindful of them. More than anything, investors should ensure that they have a long-term investment horizon. This will allow the fund manager and underlying securities to mitigate the associated risks to a considerable extent. You need to understand the various associated risks of these funds. You may not consider investing in these funds if you are a risk-averse investor. The exposure to these funds should be restricted to under 15% of your portfolio as they can be volatile at times.
The following are some of the advantages of investing in the best value funds: