What Are Value Mutual Funds And How Can They Transform Your Portfolio?
When it comes to investing, most people are naturally drawn to companies that are growing fast and making headlines. However, this approach often comes at the cost of paying a premium for those stocks. Value mutual funds offer a different path. Instead of chasing short-term growth stories, these funds focus on companies that are fundamentally strong but currently undervalued by the market. The idea is simple yet powerful: buy quality businesses at a discount and wait for their true worth to be recognised over time.
In the sections ahead, we will break down how value mutual funds work, why they matter for your portfolio, compare them with other types of equity funds, explore real-world examples, and highlight best practices to invest in them effectively.
Understanding Value Mutual Funds
Value mutual funds are a specific category of equity-oriented funds defined under SEBI’s classification system. As per regulations, these funds must allocate at least 65% of their assets into equities or equity-related instruments, and their strategy must follow the principles of value investing. Value investing is not a new concept, it has been followed globally for decades by investors like Benjamin Graham and Warren Buffett. The strategy is based on identifying stocks that trade below their intrinsic value.
The concept of intrinsic value is key here. It refers to the estimated true worth of a company derived from its fundamentals. Analysts calculate intrinsic value using metrics like earnings per share (EPS), book value, return on equity (ROE), debt-to-equity ratio, cash flows, and dividend yields. If the market price is significantly below this intrinsic value, the stock is considered undervalued. Value funds invest in such companies, believing that, in the long run, the market will correct its inefficiency and recognize the true worth of these businesses.
Many undervalued companies are not start-ups or speculative enterprises. Instead, they are well-established businesses with a proven record of profitability, often facing temporary market fluctuations or negative sentiment. These firms might operate in mature industries, have consistent dividend payouts, or be market leaders in their sectors. Their low valuations often come from short-term challenges, to which the market may have overreacted.
By investing in these undervalued companies, value funds aim to generate capital appreciation over the long term. Unlike growth funds, which chase high-growth companies trading at premium valuations, value mutual funds focus on patience, discipline, and margin of safety.
Why Value Funds Matter For Your Portfolio
Adding value funds to your portfolio has multiple advantages that go beyond just returns:
Margin of Safety
When you invest in undervalued stocks, you essentially buy with a cushion. Even if the company does not grow rapidly, the fact that you paid a discounted price protects you against extreme downside. This safety net can help during periods of market volatility.
Complement to Growth-Oriented Holdings
Most investors in India today are attracted to growth funds. These funds perform very well in bullish phases but can also fall sharply during corrections. Value funds balance your portfolio by focusing on stability and dividends. They often outperform in sideways or corrective markets.
Wealth Creation Potential
The performance of Indian value funds in recent years is worth noting. As of Sept 4, 2025 - HSBC Value Fund reported an annualised three-year return of around 23.5%. JM Value Fund showed 23.6% for the same period, while ICICI Prudential Value Fund and Axis Value Fund delivered over 22%. These numbers show how value investing can deliver superior long-term returns when held patiently.
Industry Growth
The Indian mutual fund industry has been expanding rapidly. Equity-oriented assets under management (AUM) rose from ₹ 7.65 lakh crore in July 2020 to over ₹ 33.32 lakh crore in July 2025. Value funds have benefited from this trend, with several schemes crossing ₹ 10,000 crore in AUM. ICICI Prudential Value Fund is currently one of the largest in this category, managing more than ₹ 53,000 crore.
Regulatory Support
SEBI’s recent proposal to permit asset management companies (AMCs) to operate both value and contra funds without requiring 50% portfolio overlap gives investors more choice. This change strengthens the position of value funds as a distinct and attractive investment option.
Value Funds vs. Other Equity Funds
To better understand the uniqueness of value funds, compare them with growth and flexi-cap funds:
Feature | Value Funds | Growth Funds | Flexi-Cap Funds |
|---|---|---|---|
Investment Strategy | Buy undervalued companies trading below intrinsic value | Buy fast-growing companies, often at high valuations | Flexible allocation across large-, mid-, and small-cap companies |
Risk Profile | Moderate, downside cushion due to undervaluation | Higher, vulnerable during corrections | Moderate to high, depends on allocation |
Dividend Income | Relatively higher, many holdings are dividend-paying | Lower, focus on reinvestment for growth | Mixed, depends on holdings |
Time Horizon | Best suited for 5–7 years or longer | Suitable for 3–5 years | Suitable for medium- to long-term |
Performance Cycles | May underperform in bull markets, outperform in corrections | Strong in bull phases, weak in bear markets | Balanced across cycles |
Real-World Examples of Value Funds in India (As of Sept 4,2025)
Here are key value mutual funds that have showcased noteworthy performance:
HSBC Value Fund (Direct Growth)
- AUM: ₹ 13,816 crore
- 3-Year Annualised Return: 24.77%
- Fund Allocation: High exposure to private banks (14.77%), construction & engineering (9.30%), IT services (6.92%), public banks (6.78%), and fertilizers & agro chemicals (5.07%)
With a high allocation in stable sectors and a strong dividend history, this fund exemplifies how disciplined value investing can yield strong long-term performance.
ICICI Prudential Value Fund
- AUM: ₹ 53,715 crore
- 3-Year Annualised Return: 22.27% (as of August 2025)
- Portfolio Highlights: Top holdings include Reliance Industries (7.61%), ICICI Bank (7.02%), HDFC Bank (6.77%), Infosys (5.19%), Axis Bank (4.28%), SBI (4.05%)
Being one of the largest value funds by AUM and offering double-digit multi-year returns, it remains a cornerstone for long-term value investors.
JM Value Fund (Direct Growth)
- AUM: ₹ 1,062 crore
- 3-Year Annualised Return: 24.97% (as of August 2025)
- Top Holdings: Includes HDFC Bank, Godfrey Phillips, Larsen and Toubro Ltd, Hindustan Petroleum, Whirlpool of India, among others.
Despite a relatively smaller AUM, this fund stands out with one of the highest recent three-year returns, reflecting the power of focused value stock selection.
How to Incorporate Value Funds into Your Portfolio
If you want to integrate value funds into your investment strategy, here are some actionable steps:
Clarify Your Goals
Define whether you are investing for retirement, children’s education, or wealth accumulation. Value funds work best for long-term goals spanning at least five to seven years.
Evaluate Track Records
Review three- and five-year returns, consistency across market phases, and portfolio turnover ratios. Funds with experienced managers and disciplined processes usually fare better.
Choose SIP or Lump Sum
Systematic Investment Plans (SIPs) help average out volatility and are suitable for salaried investors. Lump sum investments may be considered during market corrections when valuations are broadly attractive.
Ensure Diversification
Avoid overconcentration in one category. For example, if your portfolio already has heavy exposure to growth funds, adding a value fund balances the style mix.
Monitor Periodically
While value investing requires patience, annual reviews are essential. Monitor expense ratios, fund manager changes, and performance consistency.
Common Pitfalls With Value Investing
Even though value funds have merits, investors should be aware of potential pitfalls:
- Expecting Quick Results: Value investing requires patience. If you expect quick profits, you may feel disappointed, as undervalued stocks can take years to be recognised by the market.
- Falling into Value Traps: Not every undervalued stock is a bargain. Some companies remain cheap due to structural weaknesses. Skilled fund managers mitigate this risk, but it cannot be eliminated completely.
- Overallocating: Investors sometimes allocate excessively to one category, ignoring diversification. A balanced allocation across value, growth, and hybrid funds is wiser.
- Chasing Past Returns: Investors often enter funds after seeing high past returns. However, future performance depends on valuations and market cycles. Always align investments with your goals, not just past data.
Conclusion
Value mutual funds play an essential role in building a disciplined and diversified portfolio. They focus on identifying fundamentally strong businesses that are temporarily undervalued, offering both safety and growth potential. For investors, value funds provide stability during market corrections, complement growth-oriented investments, and create long-term wealth when held patiently. By carefully selecting top value mutual funds, aligning them with your financial objectives, and staying invested, you can use these funds to transform your portfolio over time.
More Related Articles
What Are Asset Classes in Mutual Funds?
4 February 2026 | 14 mins read
When you start your investing journey, you often hear phrases like asset class, asset allocation, equity exposure, debt mix, or diversification. These terms can sound technical at first, but once you understand what an asset class is and how it works within mutual funds, you gain much more control over how your money grows. Asset classes determine your portfolio's risk, expected returns, stability, and long term wealth creation potential.
What Are Smart Beta ETFs?
4 February 2026 | 12 mins read
If you have been exploring different ways to invest in the equity market efficiently, you may have come across the idea of smart beta. Over the past few years, smart beta ETFs have become popular across global markets, and Indian investors are gradually adopting them as well. These funds offer a blend of the systematic nature of passive investing with the targeted exposure of factor-based strategies. This combination appeals to investors who want more control over the characteristics they hold in their portfolio without relying on fully active management.
Importance of Investment Horizon in Mutual Funds
23 January 2026 | 15 mins read
While investing in mutual funds, most investors focus heavily on returns, past performance, or which fund is currently popular. However, one of the most critical factors that often gets overlooked is the investment horizon. Your investment horizon plays a decisive role in determining which mutual fund suits you, how much risk you should take, and what kind of returns you can realistically expect.
FAQ
Are value funds high risk?
Value funds are moderately risky. They are less volatile than growth funds because they invest in undervalued companies with stable fundamentals. However, they may underperform during strong bull markets when high-growth stocks dominate.
Should I invest in value funds?
You should consider value funds if you have a long investment horizon of at least five to seven years. They are suitable for investors seeking diversification, stability, and consistent wealth creation rather than rapid short-term gains.
What returns can I expect from value funds?
Recent three-year returns of top value funds have ranged from 18% to 24% CAGR. Over the long term, you may expect returns slightly above benchmark indices, provided you remain invested and disciplined.
Are value funds taxable?
Yes. As equity-oriented schemes, short-term capital gains (up to 12 months) are taxed at 20%. Long-term capital gains (over 12 months) are taxed at 12.5% on amounts above ₹ 1.25 lakh in a financial year. Dividends received are also taxable as per your income slab.
What are the risks involved?
Key risks include value traps, delayed recognition of undervaluation, underperformance in bull markets, and sector-specific downturns. Choosing experienced fund managers reduces these risks.
How do value funds compare with growth funds?
Growth funds invest in companies expected to deliver rapid earnings growth, often trading at premium valuations. Value funds, on the other hand, invest in companies priced below their intrinsic worth. Growth funds may perform better in bullish markets, while value funds offer more resilience in corrections. Including both in your portfolio can provide balance.
What is the minimum investment required in a value fund?
Most value funds in India allow investments through Systematic Investment Plans (SIPs) starting as low as ₹ 100–₹ 500 per month. Lumpsum investments usually begin at ₹ 1,000 or ₹ 5,000, depending on the fund house. This flexibility makes them accessible to a wide range of investors.
Can value funds provide regular income?
Some value funds invest in dividend-paying companies, which can offer periodic income. However, dividends are not guaranteed and may vary depending on company performance and market conditions. If you are specifically looking for consistent income, you may need to combine value funds with debt or hybrid funds.
Are SIPs better than lumpsum for investing in value funds?
Both approaches work, but SIPs are generally more suitable for most investors. With SIPs, you invest regularly, average out costs, and reduce the risk of entering the market at unfavourable times. Lumpsum investments may deliver higher returns if timed during market corrections, but they also carry higher risk.
How long should I stay invested in value funds?
Ideally, you should remain invested for at least five to seven years. This allows enough time for undervalued stocks to recover and deliver their true potential. Exiting too early may prevent you from benefiting from the full cycle of value realisation.