Nobody's talking about these loss-making funds. Should you?

Summary: Value funds are the forgotten cousins of the mutual fund world. They’ve just delivered one of the worst one-year performances in equity funds, with all but three schemes sitting on losses. No wonder investors have shunned them. However, history shows that value funds often shine when market valuations take a breather, and right now, data suggests that may be the case. So, we dig into value funds’ track record when the market flies below the average P/E range, their long-term consistency and the funds that have quietly beaten the market in the long run.

Read any mutual fund-related story and you’ll hear the same buzzwords: small caps, flexi caps, international funds. One category you won’t hear much about? Value funds.

In fact, in the first quarter of this financial year (April-June 2025), value funds were the second least popular pure equity fund category, attracting just a little over Rs 2,000 crore in inflows. (The only category worse off was ELSS funds, but that’s more due to changes in the tax regime.)

And frankly, investors can’t be blamed for looking the other way. Over the past 12 months, value funds as a category have delivered negative returns of over 7 per cent, among the worst showings in the equity fund universe. At an individual level, just three funds managed to stay in the green, while the other 24 active value funds with a one-year track record all ended up in the red.

So, with such a lacklustre record, why are we even talking about value funds? The answer lies in where we are today: valuations. The BSE 500’s price-to-earnings (P/E) ratio is 24.5 as of September 5, 2025, which is below its long-term P/E median, as per Screener and Trendlyne.

So, when markets trade below their historical average, value funds can become a powerful foil in your portfolio. Let’s unpack why.

What exactly are value/contra funds?

Value or contra funds are diversified equity funds that focus on buying stocks that look undervalued compared to their intrinsic worth. Think of it as bargain hunting in the stock market. You look for good businesses that are temporarily out of favour, available at a discount.

This strategy rests on a simple premise: markets overreact in the short term, but in the long run, stock prices gravitate towards their true value. By buying when stocks are cheap, value funds aim to capture this correction and deliver superior returns.

When value funds shone

History shows that value funds tend to do well when the market is trading below its median valuations. A good example in the five years is the period between November 12, 2021, and July 23, 2024, when the P/E of the BSE 500 was below its average historical value.

During this stretch, the BSE 500 TRI delivered 16.5 per cent annualised returns. Value funds, however, comfortably outperformed. Of the 19 value funds in existence:

• Only one fund underperformed the benchmark.
• Impressively, 14 funds delivered over 20 per cent returns, with JM Value (28.6 per cent annualised returns), SBI Contra (26.6 per cent), HSBC Value (25.3 per cent), Templeton India Value (24.5 per cent) and Kotak Contra (24.2 per cent) leading the charts.

In contrast, flexi-cap funds (which have more freedom in their stock-picking and don’t have to stick to valuation metrics) struggled in comparison over the same period. Of the 22 flexi-cap funds existing then, only five delivered above 20 per cent annualised returns, and 10 couldn’t even beat the benchmark BSE 500 TRI’s 16.5 per cent.

This makes it clear: when the market turns undervalued, value funds often have the edge.

A deeper look: rolling returns

Of course, looking at one time period isn’t enough. To check whether value funds consistently add value, we examined their five-year daily rolling returns over the last five years. Basically, we considered active value funds with a 10-year history.

But first, what does “rolling returns” mean?

Think of rolling returns like a batting average. Looking at Virat Kohli’s score in just one or two matches won’t tell you much. But track his average over hundreds of innings, and you know how consistent he really is.

Rolling returns do the same for funds. Instead of judging them on one period, they calculate returns across many overlapping five-year stretches. This smooths out one-off ups and downs and shows you how reliably a fund performs over the long run.

With that in mind, here’s how value funds fared compared to the BSE 500 TRI’s 16.26 per cent, based on daily five-year rolling returns in the last five years.

The verdict: 11 out of 15 value funds beat the index on this measure. That’s an impressive strike rate, showing that over the long run, value funds can indeed be a handy tool in your portfolio.

Why we prefer diversified equity funds

At Value Research, we’ve always emphasised the importance of diversified equity funds — categories like flexi caps, multi caps, large & mid caps and yes, value funds.

Why? Because these funds don’t put all your eggs in one basket. Instead, they spread your money across sectors and market capitalisations, giving you exposure to different parts of the economy. That means if one sector or market cap segment is going through a rough patch, others can balance it out.

Contrast that with sectoral or thematic funds. They look exciting when their theme is in favour, like IT funds during a tech boom or pharma funds during the pandemic. But the problem is, when the tide turns, they can crash hard, dragging down your portfolio with them.

In short, think of diversified equity funds as the all-weather tires of your investment portfolio. They may not give you the thrill of a theme fund during a hot streak, but they’ll keep you steady and moving forward no matter the road conditions.

Want to consider investing in a value fund?

Explore Value Research Fund Advisor, our premium service that handpicks the right funds for your goals and risk appetite. Furthermore, not all value funds are created equal. As the rolling returns show, some funds like SBI Contra, JM Value, Kotak Contra and ICICI Pru Value have consistently outperformed, while others have lagged.

Fund Advisor doesn’t just help you cut through the clutter and zero in on consistent performers. They also go beyond just returns by evaluating the fund manager’s track record, risk-adjusted performance and other key metrics.

Want to know which value funds are on our Best Buy list…

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Also read: 5 value funds turned Rs 10,000 SIP to Rs 33 lakh+ in 10 yrs