When to Invest in a Value Mutual Fund

It can be difficult to determine the value of a mutual fund accurately. Value is often confused with other factors, such as price of net asset value. A mutual fund cannot be measured on these statistics alone. A "value" fund is one that is actually priced below what the indicators would deem its reasonable price. Finding a value fund can be a challenge, but if you locate one, investing will almost always provide profitable returns.

Value vs. Net Asset Value

Value in a mutual fund is not to be confused with net asset value, one of the fund's underlying statistics. Net asset value is simply an expression of the sum of the underlying securities in a mutual fund, minus any liability, divided by the total number of shares in the fund. It is like dividing up the pieces of a pie to determine how many apples are in one slice. Net asset value is a good determinant of price, but it is not always indicative of value. Mutual funds payout their capital gains and income, so the net asset value of a profitable fund may be no different from the net asset value of a less profitable fund.

Value Fund vs. Growth Fund

Financial analysts often produce two types of investors. The first type goes after constant growth funds, or those funds which have consistently posted good returns, and are likely to continue doing so in the future. Because these funds are "good," they are also expensive when compared to other mutual funds. Constant growth funds may even be overpriced, but investors are willing to pay more because they do not understand the actual value of the fund.

The other type of investor is the one that will purchase the value fund. Value funds, on the other hand, are under priced. They are set to perform well in the future, but they have not yet picked up enough steam to be priced at their actual worth. As such, buying them would give the investor a "discount" on the purchase price.

Best time to Invest in a Value Mutual Fund

You can identify a value mutual fund based on a number of tools at your disposal. These tools include fund ratings, relative returns of the fund and standard deviations in the fund's profitability from year to year. Highly rated funds with high relative returns and low standard deviations are the most valuable. The problem is, this may represent a constant growth fund, which would embody all of these characteristics but be trading at a price consistent with these factors.

You are looking for a fund trading at a discount. This involves taking a little risk. If you are willing to take a risk, then you can ask a financial adviser to show you possible value funds for analysis, or you can pick some on your own. It is not the best idea to pick value funds and hope you are right about them if you cannot afford to lose any money on the gamble. Instead, invest at a time you know you can wait out small fluctuations in the fund without panicking.

blog comments powered by Disqus