What is Value Investing?
20 May 2021

What is Value Investing?

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Key Takeaways: Value Investing is a long-term investment strategy that relies on investing in stocks that are considered undervalued at the time of investment. If you are an NRI looking to invest in India, you can consider mutual funds based on the principle of value investing. Let us understand what this strategy is.

Value Investing is a strategy that involves identifying companies that have sound long-term prospects, but their stocks are undervalued. Value fund portfolios seek stocks that they reckon the markets underestimate and whose prices do not mirror their companies' fundamentals. Investing in such stocks at discounted prices can lead to great returns in the long term.

Value investing involves rigorous research of the company's financials and the sector under which it falls. Value mutual funds don't follow the herd and instead make decisions that often go against the overarching market sentiment. They don't believe in the idea that markets are efficient and that a company's stock price at any given time reflects the real value of the stock, having accounted for all the factors determining the company's value.

How does Value Investing Work?

Value fund investors understand that a particular company's stock is undervalued and hence should be bought at the current price. Think of it as purchasing a seat on a flight several months in advance. As a buyer, you know a particular time slot is popular, but for some reason the current prices are low or the airline is offering a discount. It helps to know why your flight ticket is available at a discount.

Similarly, while selecting stocks, value fund managers try to find the 'intrinsic value' of any share. The intrinsic value is derived by analysing a combination of revenue, cash flow, expenses and debt. A few metrics used include:

  • Price-to-book (P/B) ratio that calculates the value of a company's assets and compares them to the stock price.
  • Price-to-earnings (P/E) ratio that compares the stock price to the company's earnings record.
  • Discounted cash flow that analyses the company's projected cash flows in the coming months and years to ascertain its current value.

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Advantages of Value Investing

If done correctly, there are a few key advantages to adopting a value investing strategy. Here they are:

Beating the market: Since you are investing stocks that are undervalued, you get them relatively inexpensive and they can deliver good returns in the future. The amount of returns you get depends on how well you have researched the company and how accurately you have ascertained its intrinsic value while investing. Many undervalued stocks end up beating the benchmark indices in the long term.

Protection from fluctuations: As mentioned, the strategy involves rigorous research and the investment is based on a company's past, present and future performance as well as analysing other factors such as the state of the economy. Such stocks are often unaffected by market shocks in the long term. A dip in the market due to external factors may bring the stock price down momentarily, but the stock will rebound faster than others.

Preparing to Invest

If you want to invest in mutual funds based on value investing, here are a few points you must keep in mind:

  • Don't follow the herd: Market movements are often based on prevailing sentiment or as a reaction to significant development. A little more research goes a long way in choosing the right portfolio.
  • Think long term: Before the stock reaches the intrinsic value, it will experience some highs and lows. It helps to hold on to your investment for at least five years or more.
  • Diversify your portfolio: Markets and the economic situations are dynamic and no stock will gain under all conditions all the time. Choosing more than one mutual fund scheme helps spread the risk of losses from low prices.

Final Note: Mutual funds in India continue to remain popular among residents and NRIs alike. If you are planning to invest, it helps to study value funds' performance before deciding.

Long-term financial plans on your mind? !

*This article is for information purposes only. We recommend you take independent advice before undertaking any investment.

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