Do you know that value mutual funds can help you find undervalued stocks having long-term growth potential? These mutual funds invest in companies that are currently trading below their intrinsic value.
Value funds bring you the opportunity to capitalize on future gains of undervalued stocks. So, if you are looking for smart and strategic investments to boost your portfolio, value funds are for you.
In this blog, we have discussed the approach through which value funds can help you create long-term wealth.
5 Ways Value Funds Can Help You Find Undervalued Stocks
Here are five strategies deployed by top fund houses designing value funds for investors.
- Focus on Intrinsic Value
One of the primary strategies used by value funds to find undervalued stocks is to determine their intrinsic value. This approach is all about evaluating the financial health, business model, and future earnings of a company. In this way, experts determine the true worth of the company.
Often, stocks tend to trade below their intrinsic value due to market conditions. This provides an opportunity for value funds to invest in these companies at a lower price. Therefore, investing in value mutual funds brings you a chance to ride their growth potential once the market corrects.
- Identifying Strong Fundamentals
Typically, value funds look for companies with strong fundamentals. This implies that you would be investing in companies with stable earnings, low levels of debt, and consistent cash flow.
Take the instance of Nippon India Mutual Fund. This value fund returned as high as 49.29% in the last year and 27.30% in five years. The highest percentage of holdings of this fund is in established companies like HDFC Bank, ICICI Bank, and Infosys.
Most of these companies become undervalued due to temporary setbacks or broader economic trends. Since they are well-positioned for recovery, you can benefit when they reach their true potential.
- Capitalizing on Market Inefficiencies
Being an investor, you know that the stock market isn’t always rational. This is where value funds take advantage of certain inefficiencies.
The market sentiment is largely driven by investor sentiments like fear and greed. This leads to overreaction to short-term news, which leads to the deviation of stock prices from their true values.
Value funds capitalize on this opportunity and purchase stocks that are priced lower than their intrinsic value.
- Patience and Long-Term Growth
The key to success with value investing is patience. Value funds are designed for long-term growth. Rather than chasing short-term market trends, these funds invest in companies that may take time to realize their full potential.
So, when you invest in value funds, you need to wait out the period till the market stabilizes and the returns start showing up. This disciplined approach delivers significant returns over time.
- Diversification across Multiple Sectors
The ability to diversify across different sectors is one of the prime advantages of value funds. Fund managers invest in a wide range of industries, from technology to consumer goods. This significantly balances your portfolio and mitigates risk.
Diversification draws your line of defense against market volatility. Since your assets are not exposed to a single sector, you benefit from the recovery of undervalued stocks in multiple industries.
Conclusion
Investors benefit from a strategic and disciplined approach to investing in the stock market through value funds. This is a hands-free approach to finding undervalued stocks by analyzing the fundamentals of strong companies yourself. Compare the performances of top-value funds to make an informed decision.
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