Only 4 value mutual funds delivered double-digit returns in one year. Here’s why experts aren’t worried

Value mutual funds had a disappointing one-year run, at least on the surface. Data from Value Research shows that only four of the 23 value-oriented mutual funds delivered double-digit returns over the past year, while nine schemes posted negative returns.

The numbers paint a picture of a category that struggled to keep pace. But experts say the headline data tells only part of the story. They argue that the recent divergence in returns has more to do with how individual fund managers selected stocks and built portfolios than with the value investing style itself.

Only four funds managed double-digit returns

Among the 23 schemes, Quant Value Fund topped the category with a 16.23% one-year return.

At the other end of the table, JM Value Fund fell 5.74%, making it the weakest performer over the period. Sundaram Value Fund (-3.87%), Quantum Value Fund (-3.75%), Canara Robeco Value Fund (-2.22%), and Templeton India Value Fund (-1.67%) also ended with losses.

The largest fund in the category, ICICI Prudential Value Fund, with assets under management of over ₹60,000 crore, also delivered a negative return of -0.72%.

Why did only a handful of funds outperform?

According to Jiral Mehta, Senior Manager-Research at FundsIndia, the weak showing of several funds should not be interpreted as a failure of the value investing style.

“Our research shows that the value style has actually been the best-performing investment style over the past one, three and five years among all the styles we track, ahead of quality, momentum, low volatility and even the broader Nifty 500,” she said.

If the style itself has performed well, why did only four funds generate double-digit returns?

Mehta said the answer lies at the fund level. “When the broader style tailwind is present but only a handful of funds capture it, the gap usually comes down to stock selection and portfolio construction. Some funds leaned into pockets of the market that remained undervalued for longer than expected, while others held companies where the expected valuation re-rating simply hasn’t happened yet.”

Sriram BKR, Senior Investment Strategist at Geojit Financial Services, echoed that view, saying sector allocation played a key role in performance. According to him, some of the underperforming value funds had larger exposure to sectors such as IT and FMCG, which faced earnings growth concerns and price pressure during the period.

When do value funds typically perform well?

Experts say value investing is inherently cyclical and tends to perform best when market leadership broadens.

Amitabh Lara, Executive Director at Anand Rathi Wealth, said value funds generally outperform during market recoveries, economic upcycles and broad-based rallies, when undervalued companies begin to see their intrinsic worth reflected in market prices.

He pointed to the post-pandemic rally as an example. Following the Covid-led market correction, value funds delivered an average return of about 35% in calendar year 2021, outperforming the Nifty 50 by nearly 10 percentage points. However, he said, the past two years have been different as global uncertainties and geopolitical tensions delayed the valuation re-rating of many fundamentally strong companies, resulting in muted returns for much of the category.

Should investors judge value funds by one-year returns?

Experts believe the answer is no.

Lara said the recent underperformance should be viewed as a normal phase of the value investing cycle rather than a structural weakness in the category. Given that value investing often takes time for the market to recognise undervalued businesses, he recommends investors stay invested for five to seven years to experience different market cycles.

Mehta offered a similar perspective, citing FundsIndia’s research on performance persistence. The study found that only around 26% of funds that ranked in the top quartile over one three-year period remained in the top quartile over the next three years. Over five-year periods, that figure falls to about 21%, suggesting that short-term outperformance or underperformance is rarely permanent.

Instead of focusing on one-year returns, she said investors should assess a value fund based on its rolling three-, five- and even 10-year performance, downside protection, consistency of its investment philosophy, portfolio valuations and the fund manager’s ability to stick to a disciplined value approach across market cycles.