Finance

What is a value fund and how does it differ from a large or a multicap mutual fund?

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Value funds, large cap funds, and multi cap mutual funds all have one thing in common, they help investors achieve their investment goals. However, each of these funds has its own unique characteristics that set it apart from the others in the category. So, how do you decide which fund aligns best with your investment aims?

Let’s delve into what sets value funds apart from other two mutual fund types. How do they approach investments differently, and what can you expect from each? This will help you assess which fund or combination aligns perfectly with your financial goals.

What constitutes a value fund?

A value fund primarily invests in stocks considered undervalued. These funds involve companies with strong fundamentals but whose current market price does not reflect their intrinsic worth or true value. 

Value investors often consider metrics like the price-to-earnings (P/E) and price-to-book (P/B) ratios when searching for promising stocks to purchase. The belief is that, over time, the market will recognise the true value of these stocks, causing their prices to rise.

Understanding large cap funds and their key characteristics

Large cap funds invest in India’s top 100 stocks by market capitalization. These equity funds allocate a significant portion of their assets to established, reputable companies with a history of generating long-term returns. 

These companies, due to their substantial capital, reliably manage debt, weather market volatility, and maintain favourable debt-to-equity ratios. They are sizable corporations with diverse income sources, reducing vulnerability to revenue disruptions. Large cap funds earn recognition for sound management, timely dividend payouts, strong balance sheets, and high liquidity. 

Multicap funds and their core features

Multicap funds are mutual fund investments that diversify across various market capitalization categories: large, mid, and smallcap. These funds are mandated to allocate a minimum of 25% each to companies in these three categories. This rule leaves the remaining 25% at the discretion of the fund manager, who can invest it in any of the three market cap types based on their judgement and market conditions. 

This approach gives multicap funds a unique blend of flexibility and diversification, offering a well rounded exposure to various companies, from well-established large cap firms to potentially high-growth midcap and smallcap companies.

How does a value fund differ from a large or a multicap mutual fund?

Criteria Value fund Large cap fund Multi cap fund
Investment focus Stocks considered undervalued Companies with high market capitalization Diverse range: large, mid, and small cap companies
Investment approach Low price-to-earnings (P/E) ratios, price-to-book (P/B) ratios, and other fundamental indicators of undervaluation. Focus on stability, consistent performance, and dividend-paying stocks, typically having lower volatility. 25% each in large, mid, and small cap, rest is manager’s discretion
Risk level Medium to high Low to medium Medium to high
Return potential Usually high, depending on market correction Stable and less volatile returns  Varies; can be high or moderate depending on fund strategy
Time horizon Long term Usually long-term, but can be more flexible Flexible, depending on investor’s goal and market conditions
Flexibility Limited to undervalued stocks Limited to large companies Highly flexible; allows shifting between market caps
Diversification Usually within sectors deemed undervalued Usually within large cap space Highly diverse across sectors and market caps

Final words

As you can see, a value fund differs from large funds and multicap funds in their approach to investing. While the latter two may prioritise stability or growth potential, value funds focus on finding undervalued assets with potential for appreciation. This means investors may experience different risk profiles and earn varied returns. However, before you pick a fund, carefully evaluate your investment objectives and do your research so that it aligns with what you want to achieve.

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