Value Fund you say. What’s the big? My mutual fund better have some value, right?
We’re talking broad category…like car or truck, pizza or wings, or golf or tennis. OK, those have nothing to do with mutual fund investing. I just like them all.
We’re talking growth funds vs value funds. We covered growth funds in another video…today it’s value. A better name for Value Funds would be “Companies We Bought on Sale” Fund. Because that’s what value fund managers are doing…buying companies they believe are undervalued by the market. That’s in contrast to Growth Funds, where managers pick companies they believe are growing faster than the overall market.
How do Value managers know what’s a value, or think they know? Fundamental analysis. That’s where the mutual fund managers and analysts dive under the hood of a company and check out the financial statements. They drool over the ratios, like P/E, D/E, and ROE…stuff that would put me and probably you to sleep.
If they conclude the stock is currently trading for less than what they believe it’s worth based on all that research…then there’s overlooked value, and the company could be a fit for a value fund. At some point, the thinking goes, the market will recognize this overlooked value, and the stock’s price will rise.
Kind of like buying a home priced well below comparable homes in the market. But you’ve done your research, and the 3-bedroom 2.5 bath, 2-story has a lot of potential.
Value stocks generally pay dividends, making for a nice income play. Growth stocks typically reinvest their profits in the business, rather than paying out dividends.
Hopefully, this quick tutorial on Value Funds pays “knowledge dividends” for you.