Value Investing & ICICI Pru Value Fund Series 1
Ravi Mohan was very happy after buying a stock at Rs. 500 in October 2008 because the same stock was trading at Rs. 900 in the beginning of the year. But his joy could not last very long as the stock price dropped to Rs. 200 in 2009. Ravi bought some more share to average his cost as the stock was down by 60% than the price he bought for. Story did not end here. Today the same stock is available at Rs. 100 which he refers as his bad luck. Like Ravi most of retail investors feel that something available for less than its last traded price means it’s cheap. This is not true in most of the cases. Market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company’s long-term fundamentals. Just because everyone is jumping on a certain investment doesn’t necessarily mean the strategy is correct. Particular investment favoured by the herd can easily become overvalued. Investors normally exhibit anchoring bias and tend to make a forecast of the percentage that a particular asset class might rise or fall based on the current levels of returns. Wise investment decision is to discover the true value of the stock and buying the stock at lower than its true value.
Growth v/s Value Investing Style
Fund managers generally follow two investment strategies growth investing and value investing. The key difference between the two is the price at which the stock is available. Those who follow the growth style, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In typical usage, the term “growth investing” contrasts with the strategy known as value investing.
Value investing generally involves buying securities that appear under priced by some form of fundamental analysis like trade at discounts to book value, have high dividend yields, have low price-to-earnings (P/E) ratio or have low price-to-book ratios. The essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the “margin of safety”. Benjamin Graham is considered the father of value investing. He along with David Dodd, both professors at Columbia Business School advocated the concept of ‘Margin of Safety’ which is the cornerstone of value investing. Warren Buffett follows the Benjamin Graham School of value investing.
ICICI Pru Value Fund – Series 1
ICICI Prudential Mutual Fund has launched ICICI Pru Value Fund- Series 1. A 3 year close- ended equity scheme, which would invest in 25 – 30 high conviction stocks by following a value investment philosophy. Locking into a value-themed fund makes sense as value investing is a long-term strategy. ICICI Pru Value has indicated that there will be no bias in choosing stocks based on market capitalisation, which means that it is likely to be a multi-cap fund. Fund aims to find good companies at a reasonable price, rather than generic companies at a bargain price. Minimum investment under the scheme is Rs. 5000. The scheme has only dividend payout option and aims to declare commensurate dividends subject to the availability of distributable surplus. Fund will be managed by Mr. Sankaran Naren & Mr. Mittul Kalawadia. The NFO closes on October 28, 2013
Tax Treatment
Units of MF scheme held for more than one year qualify as long term capital asset. This is a 3 years close-ended equity scheme. Hence, redemption proceeds at maturity will be exempted from tax, if currents income tax rules prevails in future too. The dividend received in hands of unit holder is completely tax free.
The Risk Factor
Though the skills and abilities of a fund manager play an important role in balancing a fund’s risk yet there are some that are beyond his control and are collectively known as market risks. Also, there is some risk in looking at investments from a value perspective alone. For example, some real estate stock may be available at low price-earnings multiples, but they are laden with debt. The fund Manager can minimize such risk by looking at various other fundamental factors.
Conclusion
Value picking is an art which is acquired with long term investment experience. For a common investor, it is difficult to judge what a value stock. Therefore, it makes more sense for retail investors to preferably use the mutual fund route to invest in value funds to profit from this investment strategy. Value investing is a long-term strategy hence investor should invest in such fund will long term investment horizon. Market may take time to recognize the value of the stock but your patience, will eventually lead to significant gains.
