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Why a Market Crash may be an opportunity to look at a Value Funds ?

Ten years in the financial services industry, as an ardent market observer and an Advisor — I have not seen this kind of heightened market volatility and sharp price correction barely in a span of two months since the peak of the S&P BSE Sensex (made on January 20, 2020).

The Coronavirus or COVID-19 that is declared as a global pandemic has left the equity markets across the globe panting for breath.

The benchmark index has fallen like ninepins — tanks nearly 30%.

Table 1: The value-buying opportunity

Particulars S&P BSE SENSEX S&P BSE Mid-Cap S&P BSE Small-Cap
All-time high (Dates) 20-Jan-20 09-Jan-18 15-Jan-18
All-time high level (in points) 42,273.87 18,321.37 20,183.45
       
Level as of Jan 1, 2020 (in points) 41,306.02 14,998.63 13,786.69
Level as of March 20, 2020 (in points) 29,915.96 11,141.38 10,113.36
       
YTD Return (%) -27.6% -25.7% -26.6%
Correction since the all-time high (%) -29.2% -39.2% -49.9%

(Source: bseindia.com)                                                                                          
                                                                                                   

Here’s something to cheer for…

While there is no respite from the Coronavirus outbreak, the market valuations have now started looking rather attractive. The trailing 12-month P/E of the S&P BSE Sensex has cooled off from the high of 26x and is currently around 18x. Likewise, the S&P BSE Mid-cap and S&P BSE Small-cap Indices are attractively placed valuation-wise — much lower than the levels recorded in 2017 and 2018.

I believe, it is an opportune time to invest in equity mutual funds that follow a ‘value style of investing’, popularly known as Value Funds.

What is value investing?

My observation is that in the stock markets the term value investing is commonly used but not everyone follows its true sense and spirit. It is quite customary to look at the ‘price’ than the ‘value‘ a stock commands. People chase momentum, but what they forget to assess is the margin of safety and the value proposition.

Value Investing is predominantly guided by its fundamentals. A variety of tangible and intangible factors are involved, and hence finding the true value of a company is extremely important. Buying companies which are available at a huge discount to their true value is the foundation of value investing.

That said, merely buying low and selling high (any or every stock) is not value investing either. There ought to be:

  • A reasonable margin of safety
  • The potential to earn a profit, despite volatility
  • And at times taking a smart contrarian bet

Discovering the true value is important for investing.

 

Here are 4 steps to value investing:

1. Understand the business before buying a stock

2. Search for a wider ‘economic moat’

3. Efficiency of management

4. Valuations

 

It Involves risks too…

Value Funds is not for the faint-hearted. Before you consider investing, ensure you have a high-risk appetite and an investment time horizon of over 5 years. A Value Fund should occupy a portion of the Core Portfolio. The other types of funds in the Core Portfolio can be a large-cap fund and multi-cap fund.

Your Satellite Portfolio, on the other hand, can consist of a mid-cap fund, large & mid-cap fund, and an aggressive hybrid fund.

 

#Stay at home but #Stay Productive.

 

 

 

 

 

 

 

 

 

 

 

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