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Value funds are examples of mutual funds that are perceived as current trading at a price that is lower than their inherent or true market value. Generally, this may occur for several different reasons that are anticipated to only depress the cost of the funds for a short period of time. Investors will attempt to spot a value fund and acquire shares during the temporary slump, with an eye toward selling at a profit when the unit price for the shares begin to climb once again.
The pursuit of a value fund is understood to be a completely different approach to investing than the typical growth funds strategy. With growth funds, the idea is to identify mutual funds that are already showing evidence of an upswing and getting in while the price is still relatively low. The anticipation with a growth fund is that the rise will continue for an extended period of time, based on current market indicators. By contrast, the value fund has not begun an upward rise, although there is a reasonable chance that the upswing will begin shortly. In the interim, the investor quietly hangs on to the investment and waits patiently for the rise to begin.
There are a few typical reasons why a mutual fund may go through a period where there is a lower than average price to book ratio. One reason would be general market conditions that tend to inhibit the desirability of the components of the fund. If a change in those market trends is anticipated to occur over the next few months, an investor may determine that the fund is currently at the low point of the curve and quietly buy up shares in the fund. While initially producing no return, the value fund begins to yield big profits once the market changes.
A second factor that may create a value fund situation are political situations within the country of origin. Upcoming changes in government leadership may impact the confidence of investors in a given mutual fund for a period of time and cause the price for the components of the fund to lag somewhat. Investors anticipate that once elections are over and the government is once again fully defined, the value of these funds will once again rise, and may choose to acquire these mutual funds at a low price today. The result is often an attractive return on the investment.
Like any investment strategy, a value fund does carry an element of risk. There is always a chance that the market will not perform as anticipated, or that the new government will not result in a renewed vitality for the mutual fund. However, in comparison to some other investment approaches, choosing to invest in a value fund is relatively safe and tends to have an excellent chance for generating a return.
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