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Value Investing

  • Value investing may mean different things to different people. In simple words, it is the strategy of investing in stocks that trade at less than their intrinsic values. In other words, the goal of value investors is to determine companies that they believe are undervalued relative to the market or are trading at a discount to their intrinsic worth. A stock might trade at a discount to its intrinsic value due to reasons like a dent in the company’s earnings or a one-off event that may have depressed the stock price. A value investor would look at it as a long-term investment opportunity.

  • Among various investment styles, value investing has emerged as the most famous . Given the scale, longevity and consistency of the track record of Berkshire Hathway, value investing has emerged as the most successful investment strategy. So, it’s no wonder that most professional investors would want to ascribe their investment success to it. In India, with its limited investment history (Nifty 50 index was created only in 1995, as against S&P 500 in 1957), value investing has always been regarded as the pure form of investing. Myriads of local practitioners of this style have emerged over the years.

  • Risk and return are directly related. Lower the risk, lower will be the returns, while with high returns comes high risk. To generate high returns, one has to invest in market- linked investments as against fixed-income products.

  • An asset class that has the potential to deliver high returns is equity. Several studies done in the past have shown that compared to other asset classes, equities have delivered higher inflation-adjusted return over longer term.
  • High Return Investment Options

    Direct equity

  • Investing in shares or stocks means one is taking exposure in the equity asset class. Investing in shares that are traded either at Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) refers to secondary market. One needs to open a demat account with a brokerage house to start investing in them. One may diversify across sectors and market capitalisations to hedge against the risk of investing directly in stocks.
  • Initial public offering

  • For a company's shares to be listed on any exchange, the shares have to be initially made available to the public through an initial public offering (IPO), i.e., the primary market. A public issue is an offer made to the public to subscribe to the share capital of a company at a certain issue price. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations. On the listing date, it becomes a part of the secondary market and investors can buy or sell them. According to an ET Online story, the primary market emerged as a money spinner for investors in 2017-18, with 65 per cent of the newly listed companies trading well above their issue prices, giving returns of up to three times.
  • Equity funds: Mid and Small Cap schemes

  • Among the various types of equity funds based on the market capitalisation of stocks they invest in, the mid-cap and small-cap schemes are prone to higher volatility and hence have the potential to deliver high returns. According to the Securities and Exchange Board of India's (Sebi) latest mandate, mid-cap schemes should invest in 101st-250th companies in terms of full market capitalisation, while small-cap schemes should invest in the 251st company onwards in terms of full market capitalisation. The minimum investment in equity and equity-related instruments of mid-cap and small-cap companies has to be maintained at 65 percent of the scheme's total assets.
  • Equity-linked savings scheme (ELSS)

  • ELSS is a type of mutual fund, which is similar to any diversified equity mutual fund that routes investments. The minimum investment in equity and equity-related instruments has to be at least 80 percent of total assets. It, however, comes with some intrinsic features. It stands apart from a normal mutual fund as it carries a tax benefit on the amount invested and thereby has a lock-in period for funds invested for a period of 3- years. ELSS schemes may have a small and mid-cap bias. Fund managers may like to take advantage of the three-year lock-in period to exploit value stories in various sectors. If your objective is to be invested for the long term and also save some taxes along the way, ELSS schemes could be a good bet.