The goal of the value mutual fund – like that of many mutual funds – is to grow. The difference is in how it operates to achieve that goal. While most funds will operate more conservatively or aggressively, a value fund operates with more of a conservative aggression by seeking to invest in funds that are undervalued. This opens up an arbitrage opportunity where your money should have a strong possibility for growth. Of course, there is still risk involved. Let’s look at some of the ways a value mutual fund aims to achieve growth while undercutting risk.
The aggressive growth funds are more heavily weighted in equities with a lot of room to grow. The value funds are looking for safer bets. Investments are made to companies that have high value to the economy but the price of their stock does not reflect the current weight of what they provide. The form of investing derives from the investing strategies of famed investors Warren Buffet and his mentor, Benjamin Graham. If you are looking for a sound investing plan, they are two solid people to follow.
The premise behind value investing is not too complicated. By understanding the intrinsic value of a thing (or a company) you will be able to identify when it is being undervalued. Thus, when you see that something is selling lower than the value it holds, you have an obvious opportunity to acquire shares in the company at a discounted rate. This may not provide the upside that investing in small companies for their future growth can. Instead, it looks to provide returns with a greater certainty and much lower risk of losing money.
The Irrational Market
This kind of investing depends upon the irrational nature of the stock market. The method understands that it is within the nature of the market to overact to news concerning particular companies. This forecasting will result in over corrections and dramatic movement in prices regardless of the actual value the company provides.
Value investing is best for those looking for a long-term investing strategy that they can utilize for steady and reliable growth. This strategy is not attempting to invest in the future industry giant like Amazon to get involved with early. Instead, it is interested in finding companies that pay large and reliable dividends.
This form of investing generally requires diligence and patience since it is looking to acquire smaller amounts of consistent growth over a longer period of time. These are qualities many average investors do not possess. This is why implementing a value strategy might best be done through a mutual fund where the required diligence and patience is implemented passively for you.
The strategy of a value fund in holding an undervalued stock and selling it when it appreciates to its estimated value is one that generally results in lower turnover and lower expense ratios within funds. This is especially beneficial to decrease the amount of taxable events within a fund and also lower the amount you are paying to the fund manager. If you are willing to put more at risk for a higher upside, you may want to look at more aggressive fund. But, if conservative growth is to your liking, you should at least be making a portion of your contributions to a value fund.