Before you invest your money in a value fund, it is important to understand how it works. Value funds follow the strategy of value investing to generate high returns on the investment. This form of investment chooses stocks that are trading at a discount as compared to its intrinsic value (Book Value).
The key to value investing is to identify those shares that are backed by strong companies but currently trading at a discount. This means they are trading at a price, which is less than its fair value.
The intrinsic value of the share might be high but it is being traded at a lower rate for some reason. Investors choose to invest in these stocks with the hope of generating higher returns in the long run.
In order to benefit from this form of investment, it is important to have a long time horizon. The fund will perform when the value of the shares rise but it will require patience because the market will not change overnight.
It is a well-known fact that opportunities arise when assets are undervalued. Investors who focus on their long-term goals buy assets when the market is down and they hope to make a profit when the market is high.
This is the same fundamental behind value investing. You buy stock when it is cheap and sell it when its market value rises. If this strategy is successful, you will be able to gain a substantial amount by the end of the investment period.
In addition, when the stocks generate income in the form of dividends or bonus, you benefit from the same and your total returns increase. However, you need to have knowledge of the market before you make an investment in the shares; this is why value funds are ideal for you. They are professionally managed by fund managers who have the knowledge and expertise of the market.
Value investing is very different from all the other types of investment strategies, as, in other investment strategies, stocks of mid-cap and large companies are chosen for an investment so that it generates a return as the market rises.
In this form of investment, lower priced stocks are chosen, which have the potential to grow with time, due to which, the risk-reward trade-off is different in this investment strategy, as compared to any other.
If you compare this investment strategy with a growth strategy, you notice that growth funds invest in higher-priced stocks and show high earnings. Similarly, it also has high risk and is very volatile.
In the case of value investing, the risk is low, the stocks are lower priced and the market fluctuations have minimal impact on the results.
It is important to understand how value investing works before you make the decision to invest. It might not be suitable for every type of investor, hence, gain market knowledge and compare the performance of the fund with other funds to make a well-informed decision.
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