Investing In Value Funds Vs Focused Funds: Which Is More Rewarding, Which Is Riskier?

There are different types of mutual funds, each with their own unique characteristics. Two popular categories of mutual funds are value funds and focused funds.

Value funds focus on undervalued stocks with long-term growth potential, while focused funds concentrate on a limited number of stocks for higher returns.  

Let’s explore the features, risks and top performers of these fund categories.

Value Funds: Identifying Undervalued Stocks for Long-Term Growth

Value funds are equity mutual funds that adopt a value investing strategy. They invest in stocks that are considered undervalued based on their fundamentals. The strategy seeks to capitalise on the future growth potential of these stocks.

Value funds can include companies of various market capitalisations and sectors, thus offering investors a diversified portfolio. Investing in value funds is suitable for those seeking long-term goals, as the fund invests in underperforming assets, which are likely to perform better in the long run.

Rewards: Value funds often invest in companies with solid fundamentals, i.e., high dividends, earnings, and sales, but have low share prices. Moreover, value stocks and funds tend to outperform during bearish market phases. Investors with a long investment horizon could consider these funds. Value funds may also invest in companies providing dividends.

The category gave a high average return of 29.91 per cent in one year till July 6, 2023. Out of the 17 value funds listed on Association of Mutual Funds of India (AMFI) website, 10 funds performed above the average return of 29.91 per cent in the past year.

The top performers are JM Value Fund (37.99 per cent), Quantum Value Fund (37.88 per cent) and ITI Value Fund at 34.28 per cent. The 3-year category average returns is 29.23 per cent.

Risks: As the stock selection is based on future growth potential, a higher discretion of the fund manager comes into play, making this category riskier than others. It’s important to note that past performance is not a guarantee of future returns. The cycle of underperformance may stay longer. It could be 3-5 years, and sometimes, even more. Here, two things matters the most. One, the stock picking acumen of the fund manager. This is important because finding a value in undervalued stock is tad difficult than in a growth stock. The other thing is one’s time horizon. If one’s investment horizon, is say, seven years or more, value funds may unlock value for you.

Focused Funds: Concentrated Portfolio For Higher Returns

Focused funds are open-ended schemes focused on a limited number of stocks, a maximum of 30 stocks, as per the guidelines of the Securities and Exchange Board of India (Sebi). These funds have the flexibility to invest across different market capitalisations and sectors. The minimum investment in equity and equity-related instruments should be 65 per cent of total assets

Rewards: Diversification across sectors and sizes is a key feature of focused funds. This ensures that the portfolio remains well-balanced and is not excessively concentrated in a particular sector.

Out of the total 25 focused funds listed on the Amfi website, 12 funds performed above the category average return of 23.70 per cent in the past year.

Among the focused funds, the top performers based on 1-year returns are HDFC Focused 30 Fund at 31.97 per cent, 360 ONE Focused Equity Fund at 31.76 per cent and JM Focused Fund at 29.75 per cent. These funds provide investors with a more targeted investment approach and the potential for higher returns. The category provided an average return of 24.35 per cent on returns in three years.

Risks: As there is no restriction with regard to market capitalisation, the fund manager enjoys higher discretion, thus increasing the level of risk. The fund carries concentration risk. If a particular call goes wrong, this could dent the portfolio in a big way or vice versa. Investors need to have a limited exposure in this category.