As the market has seen a meaningful correction, individuals should consider investing in value funds. These funds invest in fundamentally strong companies available at a discount to intrinsic value.
Fund managers in value funds take contrarian bets, which start delivering when market leadership shifts from expensive growth to reasonably valued segments. Value funds generate alpha through buying undervalued stocks, benefiting from mean reversion, and playing sector rotation cycles. “As sentiment stabilises, these stocks tend to see valuation re-rating, making corrections an ideal entry point for value strategies,” says Nirav Karkera, head, Research, Fisdom.
Benefits when market recovers
Market corrections are when value investing shows its worth. The broad correction across all market sizes has caused significant mispricing across financials, infrastructure, and some industrial companies. Value funds can invest across different market caps and focus on safety. These funds are well-placed to benefit when the market recovers.
Sonam Srivastava, founder, Wright Research PMS, says value investing perform best during periods of fear and correction. “Investors who bought value funds during earlier corrections often saw strong returns over three to five years. The current market looks like a similar opportunity,” she says.
Helps to generate alpha
Value funds tend to outperform particularly in early cycle recoveries and rotation-driven markets, where valuation gaps start narrowing. Value funds generate alpha primarily through valuation-driven stock selection, buying fundamentally strong companies that are temporarily undervalued and benefiting when prices revert to fair value.
Swapnil Aggarwal, director, VSRK Capital, says unlike flexi-cap funds, which diversify across market caps, value funds are more tilted toward large-cap, out-of-favour sectors, leading to sharper gains during valuation re-rating cycles.
Value investing style delivers its strongest returns in the one to two years after a market downturn, not during the bull run.
“Investors who got into value funds after the Covid crash in 2020 saw exceptional returns in 2021-22. The current correction has once again created that gap,” says Shashank Udupa, a fund manager at Smallcase.
Key factors
Investors should focus on the fund manager’s discipline and consistency in following a true value approach, as well as the portfolio’s valuation comfort (P/E, P/B vs market). They must be prepared for periods of underperformance, since value investing requires patience.