Fund Types · Chapter 12 / 35
Value funds — what "value" means in India
Buying companies below intrinsic worth. The category includes both deep-value (low-P/E) and quality-at-reasonable-price approaches.
Value investing — buying stocks at prices below their assessed intrinsic value — is one of the oldest and most-studied equity strategies. From Benjamin Graham's original framework to Warren Buffett's evolution and Joel Greenblatt's algorithmic version, value approaches have produced compelling long-term outperformance in most equity markets globally. In India, SEBI's "Value Fund" category formalises the approach but performance has been mixed; understanding why helps in deciding whether and how to allocate.
SEBI's "Value Fund" definition
The Value Fund category requires:
- At least 65% of assets in equity.
- "Value" investment strategy must be the predominant approach (not strictly defined by metric).
- An AMC may offer only one Value Fund.
The "value strategy" definition is intentionally flexible — different fund houses use different value methodologies.
What "value" means in practice
Value funds typically focus on companies trading at:
- Low price-to-earnings (P/E) ratio relative to peers or history.
- Low price-to-book (P/B) ratio.
- High dividend yield.
- Strong free cash flow yield.
- Stable or improving return on equity / capital employed.
Different fund houses emphasise different metrics. Some prefer deep-value (very cheap statistically); others prefer quality-at-reasonable-price (compounder businesses at fair valuations).
Value vs growth — the two competing styles
| Feature | Value | Growth |
|---|---|---|
| Buy criterion | Price below intrinsic value | Earnings growth potential |
| Typical P/E | Below market average | Above market average |
| Sectors | Banking, energy, utilities, cyclicals | Tech, consumer staples, healthcare |
| Holding period | 3-5 years typically | Often longer |
| Outperformance windows | Cycle bottoms, value rotation periods | Sustained bull markets |
The two styles outperform alternately. Long periods favour one, then the other; pure-value or pure-growth investors face long underperformance stretches.
Indian value style history
Indian markets have generally favoured growth over value in the past two decades. Reasons:
- Strong corporate earnings growth justified higher P/E multiples in many growth stocks.
- Many "value" sectors (PSU, banking, traditional industrials) underwent structural challenges through 2010-2020.
- The recent value resurgence (2022-2024) coincided with PSU rerating and banking recovery.
The result: Indian Value funds as a category have lagged Multi Cap and Large Cap averages over rolling 10-year windows ending in most years.
What distinguishes good value funds
- Clear articulation of the value approach. "Value" should mean something specific in the fund's process.
- Patient buying — willingness to hold cash when valuations are stretched.
- Quality screen on top of cheapness — buying cheap-and-bad businesses (value traps) is the most common failure mode.
- Manager temperament — value investing requires patience through periods of underperformance.
The "value trap" risk
A company can be cheap statistically but for good reason — declining business, governance issues, sector in secular decline. Buying cheapness without quality assessment is the "value trap":
- A textile manufacturer at 6× P/E with declining margins.
- A telecom provider losing subscribers but trading at book value.
- An exporter facing currency headwinds at 8× earnings.
Cheap can stay cheap for years. Good value funds have screens to filter for businesses where the cheapness is mispricing, not justified depreciation.
Where value works best
- Coming out of recessions / market crashes — cyclical bottoms favor value.
- Periods of interest rate normalization (rising rates compress growth multiples more than value).
- Sector rotations where previously-unloved sectors revive.
Where value struggles
- Sustained low-rate environments favoring long-duration growth stocks.
- Innovation-driven cycles where growth narratives dominate.
- Speculative blow-offs (late-bull phases tend to leave value behind).
Portfolio role
For a diversified equity portfolio:
- Value can be a 10-20% satellite allocation as a diversification hedge against growth-tilted core.
- Adds rebalancing benefit — value tends to outperform when growth corrects.
- Long horizon — minimum 7-10 years to allow for cycle play-out.
How to compare value funds
- 10-year CAGR vs Large Cap and Multi Cap categories.
- Rolling 3-year and 5-year returns — see how the fund performed across both value-favored and growth-favored windows.
- P/E and P/B of the fund's current portfolio vs benchmark.
- Sector composition — heavy financial services / energy / cyclical exposure suggests deep-value; consumer staples / IT suggests quality value.
Quant-driven value
Some recent entrants apply algorithmic value strategies — automated screens combining multiple value and quality factors to construct portfolios. These can offer lower-cost value exposure but require manager track record long enough to validate the algorithm across cycles.
Tax treatment
Standard equity LTCG / STCG rules apply. The 12.5% LTCG above ₹1.25 lakh and 20% STCG are unchanged for Value funds.
The disciplined value investor's mindset
If you allocate to value, accept that:
- Multi-year underperformance vs growth-led indices is normal during growth cycles.
- The value advantage emerges during corrections and value rotation periods.
- Switching out of value during growth cycles ("growth keeps winning") locks in underperformance just before the cycle inverts.
Patience is the unique value-investor virtue.
Sources
- SEBI — Categorisation of Mutual Fund Schemes · accessed Jun 2026
- AMFI — Equity Style Investing · accessed Jun 2026