Value Fund
A value fund is an equity mutual fund that followed a value investing philosophy, seeking to invest in stocks trading below their intrinsic or fair value as determined by fundamental analysis, with the expectation that the market would eventually recognise and correct the undervaluation.
Value investing as a philosophy was rooted in the work of Benjamin Graham and David Dodd, formalised in Security Analysis (1934) and The Intelligent Investor (1949). In India, SEBI's October 2017 categorisation circular formally recognised value funds as a distinct equity fund category, requiring them to follow a value investment strategy. At least 65 percent of the portfolio had to be held in equity and equity-related instruments, and the fund was required to consistently follow the stated value style.
The mechanics of a value fund typically involved screening for stocks with low price-to-earnings (P/E) ratios, low price-to-book (P/B) ratios, high dividend yields, or any other metric suggesting the market had priced the stock below its fundamental worth. Potential causes for undervaluation included temporary earnings disappointments, sector-wide pessimism, overlooked mid-cap companies, or businesses in cyclical troughs. The fund manager's job was to distinguish genuinely cheap stocks (with strong underlying businesses temporarily out of favour) from value traps (stocks that appeared cheap because their fundamental outlook was permanently impaired).
Value funds in India had a distinctly cyclical return profile. They tended to lag during strong bull markets when momentum and growth stocks led the rally, but outperformed during recoveries from corrections and in environments where mean reversion was at work. SEBI data and fund performance records showed that value funds significantly underperformed growth-oriented and momentum strategies during the 2018–2021 period when new-age businesses and quality growth stocks dominated, before staging a sharp recovery in 2021–2023 as cyclical sectors rebounded.
Some AMCs — notably Quantum Mutual Fund and certain schemes from HDFC and ICICI Prudential — maintained relatively disciplined value mandates. However, the distinction between value and quality or blend strategies was not always sharp in practice; many fund managers blended quality and value criteria, making label-reading insufficient for understanding the true investment style. Analysing the actual portfolio holdings, sector weights, and valuation multiples held in the portfolio provided a more reliable picture.
For patient investors with a five-to-seven-year horizon and tolerance for multi-year periods of underperformance relative to the index, value funds offered the potential for above-average long-term compounding. The core risk was both the permanence of value traps within the portfolio and the behavioural difficulty of staying invested through prolonged phases where the strategy's relative underperformance tested conviction.