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Value investors buy such stocks and wait for the market to discover these stocks. When the discovery happens, the stock prices will go up, and value investors make money. It may sound simple. But it is not very easy to execute. The market may take very long to discover these stocks and it may test your patience. The discovery may not happen at all. That is why value mutual funds are recommended to only sophisticated investors.
The last few years had not been kind to the value investing fans as a few heavyweight stocks were driving the market. Value fund managers and investors were complaining that nobody was paying attention to valuations. Everyone was ready to pay a premium to own the few stocks that were driving the market, they said. The trend was reversed in 2021. The market was up, and the rally was not driven by a handful of stocks. Most stocks participated in the rally- a broad-based rally was finally there. Thanks to the rally, value funds also managed to make a comeback. However, the lean patch taught investors a few important value-investing principles.
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When you are following value investing principles, there may be periods when your stocks would underperform in the market. All you need to do at that time is just to stick to your strategy and wait patiently. However, the last few years taught investors that it is not easy to follow. Many investors lost patience and they sold their investments.
That is why it is prudent to limit your investments in value funds. According to mutual fund managers, investors should invest a maximum of 20% in value funds. They also should remember that the market may not always pay a premium for value stocks. When the market has scant regard for valuations, value funds will underperform. If you can’t wait patiently, you shouldn’t be investing in value funds.
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If value investing still appeals to you, here is our list of recommended value funds to invest in July 2024. There is no change in our recommended schemes. Watch out for our monthly updates to find out whether your favourite scheme is performing well.
Best value mutual funds to invest in July 2024:
Our methodology:
ETMutualFunds.com has employed the following parameters for shortlisting the Equity mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of the NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i) When H = 0.5, the series of returns is said to be a geometric Brownian time series. This type of time series is difficult to forecast.
ii) When H 0.5, the series is said to mean reverting.
iii) When H0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.
Average returns generated by the MF Scheme =
[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}
5. Asset size: For Equity funds, the threshold asset size is Rs 50 crore
(Disclaimer: past performance is no guarantee for future performance.)