Value mutual fund
A value mutual fund in India is an open-ended equity scheme that must follow a value investment strategy – selecting stocks that are trading at a discount to their estimated intrinsic value – and maintain a minimum of 65% of its total assets in equity and equity-related instruments. SEBI’s October 2017 scheme categorisation circular mandated that value funds be distinct from growth, blend, or other investment-style funds, requiring AMCs to specify and adhere to a value investment philosophy in their scheme information documents. Each AMC may operate only one value fund or one contra fund (but not both).
Regulatory definition
SEBI circular SEBI/HO/IMD/DF3/CIR/P/2017/114 defined value funds as:
- Scheme type: Open-ended equity scheme following a value investment strategy.
- Minimum equity allocation: At least 65% of total assets.
- Investment style: Value investment strategy (must be described in scheme documents).
- One scheme per AMC: An AMC may offer either a value fund or a contra fund, not both.
- Market-cap constraint: None specified; fund may hold any combination.
Value investing principles
Value investing, as applied in Indian mutual funds, typically involves:
- Low price-to-earnings (P/E) ratio: Selecting stocks trading at P/E multiples significantly below sector peers or the broad market.
- Low price-to-book (P/B) ratio: Seeking companies where market price is below or close to book value of assets, indicating the market is not fully recognising the asset value.
- Dividend yield: Companies with high dividend yields relative to their price are often value candidates.
- Margin of safety: Benjamin Graham’s principle of buying at a sufficient discount to intrinsic value to limit downside risk.
- Mean reversion: The thesis that out-of-favour sectors and stocks will revert to higher valuations over time, generating returns for patient investors.
Indian value funds commonly hold positions in:
- Public sector undertakings (PSUs) trading at discounts to private-sector peers.
- Cyclical sectors (metals, cement, capital goods) at the trough of their cycle.
- Financial companies (banks, NBFCs) temporarily depressed by credit cycle concerns.
- Companies with large asset bases but temporarily depressed earnings.
Taxation
Value funds are equity-oriented (minimum 65% in domestic equity) and taxed as equity funds.
Capital gains (Finance Act 2024):
| Holding period | Tax rate |
|---|---|
| Less than 12 months (STCG) | 20% flat |
| 12 months or more (LTCG) | 12.5% on gains above ₹1.25 lakh per year |
Securities Transaction Tax applies on redemptions. The grandfathering rule for LTCG applies to pre-31 January 2018 units. See capital gains tax in India and ITR-2 for reporting.
Performance characteristics
Value strategies in India have historically:
- Underperformed growth strategies in extended bull markets driven by premium-valuation technology and consumer stocks.
- Outperformed during periods of market-wide de-rating (when all stocks fall and low-P/E stocks fall less).
- Delivered significant outperformance during commodity and PSU cycles (e.g., 2021 to 2023 infrastructure and energy cycle).
The value-growth return gap in Indian markets has been cyclical rather than structural, with neither style consistently dominating over full market cycles.
Comparison with adjacent categories
Value versus contra fund
A contra fund follows a contrarian investment strategy, taking positions against prevailing market sentiment. While contrarian investing and value investing often overlap (both involve buying out-of-favour stocks), a contra fund may buy stocks for reasons beyond pure valuation (such as fundamental business quality that the market is temporarily ignoring), whereas a value fund focuses specifically on low valuation metrics. SEBI requires each AMC to choose one or the other.
Value versus dividend-yield fund
A dividend-yield fund must invest at least 65% in stocks with above-average dividend yields relative to the market. Dividend yield is one value metric; dividend-yield funds are more specifically focused on income-generating value stocks.
Value versus flexi-cap fund
A flexi-cap fund has no stated investment style mandate; the manager may adopt any philosophy. A value fund must explicitly follow value principles.
Exemplar schemes
Established value funds include:
- ICICI Prudential Value Discovery Fund (ICICI Prudential Mutual Fund) – one of India’s oldest and largest value funds
- Nippon India Value Fund (Nippon India Mutual Fund)
- UTI Value Opportunities Fund (UTI Mutual Fund)
- HDFC Capital Builder Value Fund (HDFC Mutual Fund)
- Tata Equity P/E Fund (Tata Mutual Fund) – mandates P/E below SENSEX P/E
- DSP Value Fund (DSP Mutual Fund)
- JM Value Fund (JM Financial Mutual Fund)
These are cited for reference only.
Suitability
Value funds are suitable for:
- Patient investors with long horizons (7-10+ years) who are willing to wait for value unlocking.
- Investors who believe that disciplined cheap-buy strategies generate superior risk-adjusted returns over time.
- Investors who are comfortable holding out-of-favour sectors that may underperform for extended periods.
Value funds are less suitable for:
- Investors who require near-term market outperformance.
- Investors who follow growth investment philosophies.
Regulatory oversight
Value funds are regulated by SEBI under the SEBI (Mutual Funds) Regulations, 1996. The mutual fund industry in India framework governs operations.
References
- SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, “Categorisation and Rationalisation of Mutual Fund Schemes”, 6 October 2017.
- Finance Act 2024, Section 112A.
- SEBI (Mutual Funds) Regulations, 1996, as amended.