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Value funds are mutual funds that are perceived to be trading below their true market value due to market conditions or political situations. Investors buy shares during the dip and wait for the rise to begin, generating a return. It is a different investment approach than growth funds, but relatively safe with an excellent chance of generating a return.
Value funds are examples of mutual funds that are perceived to be trading at a price below their inherent or true market value. In general, this can occur for a number of different reasons that are anticipated to only reduce the cost of funds for a short period of time. Investors will try to spot a bottom of value and buy shares during the temporary dip, with an eye to selling at a profit when the unit price of the shares starts to rise again.
Pursuing a value fund is understood to be a completely different investment approach than the typical growth fund strategy. With growth funds, the idea is to identify mutual funds that are already showing evidence of a rally and entry 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 started a rally higher, although there is a reasonable chance that the rally will begin shortly. Meanwhile, the investor is quietly holding on to the investment and patiently waiting for the rise to begin.
There are a few typical reasons why a mutual fund might go through a period where there is a below-average price to book ratio. One reason would be general market conditions that tend to inhibit the suitability of fund components. If a change in those market trends is anticipated in the coming months, an investor may determine that the fund is currently at the bottom of the curve and buy shares quietly. Although it does not initially produce any returns, the value fund begins to generate large profits once the market turns.
A second factor that can create a bottom-of-value situation is political situations within the country of origin. Upcoming changes in government leadership may affect investor confidence in a given mutual fund for a period of time and cause the pricing of the fund’s components to lag somewhat. Investors anticipate that once the elections are over and the government is redefined, the value of these funds will rise again and they may choose to purchase these mutual funds at a low price today. The result is usually an attractive return on investment.
Like any investment strategy, a value fund carries an element of risk. There is always the possibility that the market may not perform as expected, or that the new government may not bring renewed vitality to the mutual fund. However, compared to some other investment approaches, choosing to invest in a value fund is relatively safe and tends to have an excellent chance of generating a return.
Smart Asset.
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