Value Style Mutual Funds

There are several different types of mutual funds, which mainly differ in their particular style or investment philosophy. Each particular fund may be a fit for a portion of your portfolio, and depends on your risk tolerance, investment horizon, and suggested asset allocation. In this entry, we will review the value style of mutual fund investing.

What is a Value Mutual Fund?

Mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation are known primarily as value mutual funds.  The fund managers tend to invest in companies that are out of favor, primarily due to changing investor sentiment, a poor recent track record, or an industry that isn't in the limelight. A basic way of thinking about a value fund would be to find companies that are "on sale" or a "great value", very much like you would consider the purchase of any type of consumer goods.

How do Fund Managers run a Value Fund?

As mentioned in the last paragraph, a fund manager searches for stocks that are great values relative to their peers. Typically, the fund manager buys these stocks and holds them until the stock returns to a point in which it is considered fully valued, therefore no longer on sale. There are a number of ways that mutual fund managers identify undervalued stocks in the market. They may search for a security that is a blue chip company paying a nice dividend, or a company with a low price to earnings ratio. The fund manager then considers a pool of stocks with which they think have the highest upside, and packages them into a portfolio or fund.

Negatives of Value Funds

Value funds are typically perceived as relatively stable and safe investments, since they have low volatility and are part of a long-term strategy. However, as with any type of equity, there is always going to be some degree of risk.

Several examples of performance risks may occur when:

• The company doesn't execute their business plan, resulting in poor financial results
• A reduction in dividends payable, making the stock itself less valuable
• General market and or economic weakness
• The value style of investing isn't in favor that particular period. (Usually this happens when growth is having a great year)
• Or any combination of the above

When is a Value Fund Right for Me?

A Value style of investing works particularly well during a bear or downward phase in the stock markets. Usually in periods of bad market performance, there exists ample opportunities to buy companies that are out of favor. The general investing publics herd mentality can contribute greatly in presenting this opportunity. After all, how many times have you heard of investors having to sell at a loss? Value managers are usually there to snatch up good companies shares during this time frame.

As a result of buying low and selling high, value funds usually take on a lower risk than growth funds, which tend to favor newer, risker companies with more upside. Value funds are particularly suitable for investors who are older and have a shorter timeframe. However, in general principle, almost every investor's portfolio with strong asset allocation has at least some exposure to good value funds.