Value mutual funds make a strong comeback. Should you invest? | Economic Times

After a long wait, value investing has made a comeback in the Indian stock market. Many fund managers have been saying that the value style is more lucrative at this point in the market than the growth style. Obviously, this trend has started showing up in the performance of value funds viz-a-viz the growth funds. With 59.42% returns in one year, value funds are offering great returns to the investors. Toppers in the category have earned around 97% returns in one year.For those who don't know, value funds are those mutual fund schemes which invest in stocks which are priced lower than their intrinsic value. Value stocks are basically businesses that have high potential that are temporarily out of favour. Let's take a look at the recent turnaround: Scheme name1-year returns (%)3-year returns (%)5-year returns (%)IDFC Sterling Value Dir97.967.0816.13SBI Contra82.3110.9313.94Templeton India Value71.336.0312.89ABSL Pure Value69.600.5710.88Source: Value ResearchFund managers attribute this comeback to a broader recovery in the market after the crash induced by Covid-19 in 2020. “Over the last few years as economic growth slowed down, few companies managed to gain market share and show growth in their respective sectors. The markets assigned disproportionately high valuation to such companies making the markets highly polarized. In the post pandemic economic recovery the growth appears more board based & cyclicals are doing well. Value strategy does well in this environment. The pandemic led correction in March 2020 also allowed value funds such as Quantum Long Term Equity Value Fund to buy some high quality companies at good valuation. This is also aiding performance of value funds,” says Sorbh Gupta, Fund Manager- Equity- Quantum AMC. The Nifty 500 Value 50 Index has seen a more than 100% surge in FY21. However, the road ahead might not be very smooth for value funds. Fund managers believe that these funds might be impacted by the second wave of Covid-19 and hence investors need to be cautious. “The current wave has led to a slowdown in the cyclical recovery due to the intermittent lockdown being announced across the country. However, we believe that as vaccination gathers pace, the market will once again focus on the cyclical earnings recovery which will be driven by the fiscal and market monetary stimuli announced by governments and central banks. Any sudden change in the current stance on low interest rates or liquidity could pose a risk to the cyclical recovery trade and hence impact value oriented funds,” says Daylynn Pinto, Fund Manager, IDFC Sterling Value Fund. Fund managers also believe that if a normal economic recovery, interest rate and inflation rate cycle continues, value funds should continue to do well. However, if the markets continue to move up only due to liquidity without the corporate earning upgrade cycle it will be difficult for value style to outperform.So, now what should investors do? “Overall we expect equity returns to mimic earnings growth of corporates over the long-term. An actively managed portfolio, with an ability to pick good businesses at attractive valuations, backed by decent research and investment process is good for investors,” suggests Sorbh Gupta. Mutual fund advisors believe that value funds are for the patient investors. Those who want to check their portfolio returns in short term and worry about them should stay away from these schemes. Also, one should invest only a part of the corpus, say, 20%, in value funds.