Value funds are mutual funds that invest in stocks currently considered to be undervalued in the marketplace. The idea behind investing in these securities that are not currently in favor is that it is possible to acquire them at competitive prices. When selected with care, the holdings in the value fund will eventually attract attention once more and begin to increase in value, allowing the investor to realize a greater return than seemed apparent that the time of acquisition.
Choosing undervalued stocks for purchase by value funds involves more than simply noting that a given issue can be picked up for less than was possible in recent months. Along with the low price, managers of the value funds will also consider what may be causing those stock offerings to be temporarily depressed. This may include factors such as shifts in the political environment, changes in the ownership or leadership of a business, or temporary changes in demand for the goods and services produced by the company that issues the shares. Assuming that the stock market will adjust itself within a reasonable amount of time and render those issues moot, there is a good chance the value of those shares will begin to rise again, resulting in earning a significant amount of profit for investors of those funds.
In order to maximize the potential return in value funds, many administrators take the approach of finding investments that are priced for a little less than the stocks sold by similar companies. As a means of diversifying the holdings within the value fund, an administrator may choose to secure options associated with several different industries. The idea is that if the shares associated with one industry are not faring well, there is a good chance that at least one or two of the other holdings will be enjoying decent returns at the same time. This helps to keep the overall value of the fund consistent and possibly also generate at least a small increase in value from one period to the next.
As with any investment strategy, value funds are only profitable if the selection of stock offerings is managed with care and the projections regarding future performance prove to be correct. Unforeseen events in the marketplace may cause the movement of the stocks to trend in a direction other than the one predicted. For this reason, fund managers usually monitor market activities closely so they can buy or sell holdings in whatever manner will help maintain the integrity and the worth of the fund.
