Best value-oriented equity mutual funds to invest in 2018

Value investing is an investment strategy that looks to buy stocks that are trading below their intrinsic value.

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Even as the stock market stumbles along nervously, many investors are looking for tools to navigate the volatile times in the market. And suddenly everybody is thinking about the safety of adopting a value investing strategy.

For latecomers, value investing is an investment strategy that looks to buy stocks that are trading below their intrinsic value. In other words, value investors are always trying to buy stocks that they believe are undervalued in the market. These investors hope that the market may realise or discover the true value of these stocks one days, and they will make money by holding the stocks until that time.

So, how do mutual fund investors play the value game? Simple: pick up equity mutual fund schemes that follow the value investing strategy. There are around 16 value-oriented schemes currently available in the market. ICICI Prudential Value Discovery Fund is the largest value scheme with an asset under management of over Rs 16,130 crore. The other prominent value schemes are: L&T India Value Fund, Tata Equity P/E Fund, UTI Value Opportunities Fund, and Aditya Birla Sun Life Pure Value Fund.

To make life easier for you, Mutual Funds have put together a list of recommended value-oriented equity mutual fund schemes. We have chosen four value-oriented schemes for you. The schemes are: Invesco India Contra Fund, TATA Equity PE Fund, IDFC Sterling Value Fund, and HDFC Capital Builder Value Fund.

If you are looking for schemes that would follow a value investing strategy, you can consider investing in these schemes with a long investment horizon. Here are our recommended schemes:

Best value funds to invest in 2018
Scheme name 1-year returns (%) 3-year returns (%) 5-year returns (%)
Invesco India Contra Fund -1.39 13.71 22.05
Tata Equity PE Fund -7.53 14.12 22.05
IDFC Sterling Value Fund -10.46 12.66
HDFC Capital Builder Value Fund -4.75 11.65 18.31

Methodology Mutual Funds has employed the following parameters for shortlisting the Equity mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i) When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii) When H is less than 0.5, the series is said to be mean reverting.
iii) When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance: It is measured by Jensen's Alpha for the last three years. Jensen's Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.
Average returns generated by the MF Scheme =
[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index - Risk Free Rate}
5. Asset size: For Equity funds, the threshold asset size is Rs 50 crore

(Disclaimer: past performance is no guarantee for future performance.)

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