What Are Value Funds? Strategy, Benefits & Risks

A value fund is an equity mutual fund that follows a value investing strategy. Most investing conversations in India right now revolve around momentum, what’s moving, what’s been moving, what looks like it might move next. It’s understandable. When markets were running hard through 2023 and 2024, chasing returns felt like the rational thing to do.

Value funds operate on a completely different logic. They’re built on the premise that the market misprices things regularly, that good businesses sometimes trade at levels that don’t reflect what they’re actually worth, and that patient investors willing to sit with that gap can do very well over time. 

Not exciting. Often deeply boring while it’s happening. But the track record, across multiple market cycles in India and globally, is genuinely compelling.

In 2024, value funds as a category delivered an average return of over 21%. The Nifty 500 Value 50 Index returned 20% for the year, following a 62% return in 2023 and 23% in 2022. Total inflows into the category nearly doubled from ₹11,927 crore in 2023 to ₹22,757 crore in 2024. AUM crossed ₹1.88 lakh crore by December 2024.

That kind of attention doesn’t come from nowhere. So it’s worth understanding what value funds actually are, how they work, and what the real risks look like before you decide whether they belong in your portfolio.

What is a Value Fund?

A value fund is an equity mutual fund that follows a value investing strategy. SEBI defines it as a fund that must invest at least 65% of its assets in equity and equity-related instruments, specifically in stocks the fund manager believes are trading below their intrinsic worth.

The underlying idea traces back to Benjamin Graham, who argued in the 1930s that markets are frequently irrational in the short run and that disciplined investors who focus on what a business is actually worth rather than what the market is currently paying for it can profit from that irrationality over time. 

Warren Buffett is the most well-known practitioner of this philosophy, but the basic framework has been applied by fund managers across markets for decades.

In the Indian context, value funds typically look for businesses whose share prices have fallen out of favour for reasons that don’t reflect permanent damage to the underlying business. A cyclical company in a down year. 

A PSU trading at a steep discount to book value. A consumer company that hit a rough patch and got sold off aggressively. The bet is that the market’s current pessimism about these names is excessive, and that over time, price and value will converge.

How Do Value Funds Work?

The process starts with identifying what a stock is actually worth. 

Fund managers use a range of valuation metrics for this: price-to-earnings ratios, price-to-book ratios, dividend yields, free cash flow multiples, and comparisons to historical valuations within the same sector. The specific metrics vary by fund house and manager, but the goal is consistent. To find companies where the current price is meaningfully lower than what the business appears to be worth.

Once a stock clears that hurdle, the manager examines the business itself. Is the reason for the undervaluation temporary or structural? 

A company whose earnings fell because of a one-off input cost spike is different from one whose business model is being eroded by competition or regulatory change. Value managers are trying to identify the former and avoid the latter.

After building a position, the process shifts to waiting. Value funds are not active traders. The whole thesis depends on the market eventually recognising what the fund manager already sees in the valuation. That recognition can take a quarter or it can take two years. The holding period in value funds tends to be long – sometimes uncomfortably so for investors who are used to watching things move.

SEBI requires value funds to have a minimum 65% equity allocation and mandates that the fund follow a documented value investment strategy. They are benchmarked against broad market indices, and their performance is assessed over full market cycles, not individual quarters.

Key Features of Value Funds

Value funds have a few characteristics that set them apart from other equity fund categories.

They tend to hold businesses in sectors that are either out of favour or boring by market standards at the time of purchase. In the 2023 and 2024 run, the sectors that drove value fund performance included metals, capital goods, PSUs, and real estate, none of which were particularly exciting in 2021 when they were being accumulated.

The portfolio turnover in value funds is generally lower than in actively traded growth or sectoral funds. The strategy requires conviction and patience, and frequent churning contradicts both. A low turnover rate also keeps transaction costs down, which matters over a long holding period.

Value funds can invest across market capitalisation – large cap, mid cap, and small cap, giving the fund manager flexibility to go where value exists regardless of size. This multi-cap exposure can behave differently from a purely large-cap or purely mid-cap fund and adds a layer of diversification that some investors find useful.

They also tend to pay more attention to the margin of safety. 

The fund manager isn’t just looking for stocks that seem cheap; they’re looking for stocks where the downside is limited because the price already reflects a significant amount of pessimism.

Benefits of Value Funds

The most cited benefit is long-term return potential. Value investing has a documented track record of outperformance over full market cycles both globally and in India. 

The Nifty 500 Value 50 Index delivered cumulative returns of 54% in 2021, 23% in 2022, 62% in 2023, and 20% in 2024, a run that significantly outpaced many other equity categories.

There’s also a built-in risk management dimension to value investing. Buying stocks at a discount to intrinsic value means you have a cushion against being wrong. If the business is actually worth ₹150 and you paid ₹90, you have room for error before your thesis is truly broken. 

Growth investing, by contrast, often involves paying full price or more for a company’s future, which leaves little margin if the future doesn’t arrive on schedule.

For long-term investors who find the emotional whipsaw of momentum investing difficult to manage, value funds can be psychologically steadier during drawdowns. Because holdings are typically already beaten down by the time the fund buys them, sharp additional declines are less common than in high-PE growth stocks where valuation re-ratings can be violent.

The diversification across sectors and market caps also means value funds tend not to be heavily concentrated in whatever happens to be fashionable at the moment, which reduces but doesn’t eliminate the risk of a single sector blow-up taking a large portion of the portfolio with it.

Risks of Investing in Value Funds

The risks are real and worth understanding honestly.

The most significant is what the investing world calls a value trap. This is when a stock appears cheap by standard metrics but is cheap for reasons that don’t go away. 

The business is structurally declining. The industry is being disrupted. Management is poor and unlikely to change. The valuation looks attractive on paper, but the underlying reality never improves enough for the stock to rerate. 

Coal India trading at a low P/E doesn’t automatically mean it will rerate to a higher multiple. There are structural and policy questions around the business that could keep the multiple depressed indefinitely.

The patience requirement is a genuine risk for most individual investors. Value funds regularly go through multi-year periods of underperformance relative to the broader market. The 2013 to 2017 period in India was broadly unkind to value strategies as growth and momentum dominated. 

An investor who entered a value fund in 2013 and lost patience by 2016 would have missed the rerating that followed. Entering with the right time horizon and holding through periods when nothing seems to be happening is harder than it sounds.

Value funds also tend to underperform in strong bull markets where momentum and growth styles dominate. If you entered a value fund in late 2024 after seeing the strong returns, you need to be prepared for the possibility that the next phase of the cycle might favour different characteristics.

Value Funds vs Growth Funds

The simplest way to frame this is that growth funds are buying the future and value funds are buying the present at a discount.

Growth fund managers look for businesses with high earnings growth rates, expanding addressable markets, and strong competitive positions, and they’re willing to pay a premium for those characteristics. The bet is that the growth will justify the high valuation over time. This works well when the market is rewarding earnings momentum and when interest rates are low, because the present value of future earnings is higher in a low-rate environment.

Value fund managers are looking at what’s already there, existing earnings, existing assets, existing cash flows, and asking whether the current price makes sense given what the business already is, not what it might become. The bet is on reversion that the market has overcorrected in its pessimism and will eventually price the business more rationally.

Neither approach dominates the other consistently. In India’s experience, growth significantly outperformed value from around 2013 to 2020. 

Value then staged a strong recovery through 2021 to 2024 as cyclical and PSU sectors rerated sharply. Most serious investors hold some of both, recognising that the cycle between growth and value leadership is real but unpredictable.

When Do Value Funds Perform Best?

Value funds tend to do best in specific market environments.

When the broader market is coming out of a correction or a bear phase, value stocks often lead the recovery because they’ve already absorbed significant pessimism and the downside is more limited. 

The 2020 to 2021 period globally showed this clearly, deeply beaten-down cyclical and financial stocks dramatically outperformed through the recovery.

High inflation and rising interest rate environments have historically favoured value over growth, because high rates reduce the present value of future earnings, which hurts growth stocks more. The 2022 period, when rate hike cycles played out globally, saw value outperform meaningfully in most markets.

When cyclical sectors, commodities, manufacturing, capital goods, and PSUs are in a recovery phase, value funds with exposure to those sectors can generate returns that seem disproportionate to the underlying business improvement. This is the rerating effect. The multiple expands as pessimism lifts, on top of any actual earnings improvement.

Conversely, in extended bull markets where growth and momentum dominate and where technology or platform businesses are being valued on future promise rather than current fundamentals, value funds often lag. 

Knowing which phase you’re entering is more art than science, which is why time horizon matters more than market timing for most investors in this category.

How to Identify a Good Value Fund

The most important starting point is the fund manager’s approach to valuation. 

Read the fund factsheet and any available commentary. Does the manager articulate a clear, consistent framework for how they identify undervalued stocks? Or does the portfolio look like a collection of stocks that have fallen without a coherent underlying thesis?

Portfolio composition matters. A value fund whose top holdings are simply the beaten-down names from last month’s market correction is different from one that has been patiently building positions in sectors where the longer-term thesis is structural. 

Look at what the fund actually owns, not just the category label.

Turnover ratio is a useful signal. High turnover in a fund calling itself a value fund suggests the conviction holding periods aren’t as long as the strategy would suggest. 

Low turnover, over time, indicates the manager is genuinely patient rather than opportunistic.

Past performance across a full market cycle is more informative than recent returns. The category averaged 21% in 2024, which was an exceptional year. 

A fund that did 19% in 2024 but held up better in 2022 and outperformed peers over a 5-year horizon is more interesting than one that did 29% in 2024 but struggled across other years.

The expense ratio is worth checking. Value funds with high expense ratios need to generate proportionally higher gross returns to deliver competitive net returns. The difference between a 1% and 2% annual expense ratio, compounded over 10 years, is genuinely significant.

Conclusion

Value funds are not a shortcut to returns. They require the kind of patience that feels genuinely uncomfortable while it’s being tested. 

The thesis can take years to play out, and there will be stretches where the fund underperforms and the reasons for holding start to feel less convincing than they did when you bought in.

What they offer, in exchange for that patience, is a process grounded in something real: the gap between what a business is worth and what the market is currently paying for it. That gap closes eventually. The historical record across markets and decades is consistent on this point.

Whether a value fund belongs in your portfolio depends on your time horizon, your ability to sit through extended underperformance without bailing, and whether you want exposure to the kinds of sectors and companies that value strategies typically favour. 

For investors who can answer those questions clearly, the category has delivered, and the underlying logic for why it should continue to do so remains intact.

Frequently Asked Questions (FAQs)