What’s difference between value oriented and small cap funds?

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Value-oriented mutual funds are fast gaining popularity. Fund managers pursue opportunities in currently undervalued stocks.  The last few months have seen many new value mutual funds getting launched such as Baroda BNP Paribas value fund and UTI Nifty 500 value 50 index fund. Let’s understand first what value mutual funds are who can invest?

What are value funds?

When a fund manager uses a value investing strategy, ideally, he is looking for stocks that are undervalued. Stocks which are trading lower than their intrinsic value. And whose stock prices do not reflect their true worth.

A company’s intrinsic value is calculated with crucial financial parameters like its balance sheet, profit and loss account, business model, management team, and competitors.

The fund manager of the value funds invests in stocks that have ‘value.’ The fund manager must invest at least 65% in stocks as per Sebi guidelines.

The scheme would be taxed similar to equity mutual funds, i.e., returns are taxed at 15% if redeemed within one year. After one year, you will have to pay 10% long term capital gain or (LTCG) tax on returns of 1 lakh rupees or more in a fiscal year.

Returns:

As per Value Research, on average, the value funds have given returns of 19%, 26%, and 13% over 1,3 and 5 years, respectively. JM Value Fund has given highest returns as compared to other schemes. In the last one year, the scheme has generated 33% returns. 31% in last 3 years and 15% in 5 years.

Many people do not understand the difference between value and small cap funds. Value funds  invest in companies which trade below their intrinsic value. Whereas Small-cap funds are those which invest in small companies that are not in the top 250 stocks based on market capitalisation. Small-cap funds have a high degree of risk and are very volatile. But, if the company grows, these funds also have a very high return potential for investors.

According to Jay Thacker, a Member of the Association of Registered Investment Adviser, small-cap funds in India boast an AUM twice that of value-oriented funds. Investors with significant risk appetite can invest in small cap funds. Such investors can consider 15-20% of portfolio allocation to small-cap funds.

Now let’s see who should invest in value funds?

Many financial experts recommend a minimum investment horizon of 3 to 5 years in value oriented funds. According to Jay Thacker, value-oriented funds have the potential to deliver high returns over the long term. Value funds can play a pivotal role in compounding wealth.