Value Investing with Mutual Funds

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Specialized Funds

Value Investing with Mutual Funds

Mark P. Cussen Mar 24, 2015

One major category of equity mutual funds focuses on securities that are considered to be trading for less than what analysts think they are worth. Value funds provide investors with a way to profit from this category of equities without having to employ rigorous screening methods to find individual securities that are undervalued.

Growth Investing vs. Value Investing

Most equity funds can be classified into one of two main categories. Growth funds are typically geared to invest in securities that are believed to have the potential for substantial capital appreciation over time. This type of fund typically carries a higher degree of risk and volatility than other types of funds and often focuses on sectors such as technology, communications and healthcare. These funds can be found in all cap sizes, but the smaller the cap, the greater the risk and volatility in most cases.

The existence of value funds is predicated on the assumption that the markets do not always price securities with total rationality all of the time. Therefore stocks that should be priced at a certain level may trade below that in some instances. These funds are therefore designed to profit by selecting stocks (usually of larger and more established companies that pay dividends) that the portfolio managers believe are currently undervalued for various reasons and will therefore rise in price in the future.

There are many reasons why a given company’s stock can trade for less than what it “should”, such as transient negative publicity from a company CEO getting caught in a personal scandal or a correctable defect that is discovered in one of the firm’s products. Value fund managers usually employ fundamental analysis to examine a company’s assets, financial ratios and other characteristics, including:

  • Low P/E (Price-to-Earnings) ratio – when the company’s stock price is low compared to its earnings per share
  • Low Price-to-Book ratio – comparing the current stock price to what the company would get on a per-share basis if it was liquidated
  • Low Price-to-Sales ratio – when the stock price is low compared to the company’s revenue per share relative to other similar firms in the industry
  • High Dividend Yield – as compared to similar companies
  • Future Earnings potential that has yet to be recognized by the market at large

Most value managers will then plug these factors into some sort of formula for finding these stocks, such as a set margin between the current stock price and what they feel it is worth.

Learn more about What Does a Mutual Fund Manager Do?.

The Appeal of Value Funds

Value funds can play an important role in a stock portfolio for several reasons. As with any other type of mutual fund, they offer diversification, liquidity and professional portfolio management on either an active or passive basis. Unlike growth funds, the vast majority of value funds fall into the large-cap category because of their focus on dividend-paying companies.

These dividends also provide investors with a measure of current income in addition to capital appreciation. This combination of stability and dividends makes these funds a good choice for many conservative investors who need some income on top of their growth.


While value funds are often substantially less volatile than even large-cap growth funds, their greater stability also means that they typically post lower long-term returns than their growth cousins. There are also times when the securities in these funds remain at their current price and never reach or return to the price that the fund managers targeted for these holdings, which reduces the total return posted by the fund.

Be sure to also see the 7 Biggest Mistakes to Avoid When Investing in Mutual Funds.

Five of the Best Value Funds

Fidelity Value Discovery Fund (FVDFX) – With over half a billion dollars under management and an annual expense ratio of 0.8%, this fund has provided investors with an average annual total return of almost 10% per year since its inception in December of 2002.

Vanguard U.S. Value Fund (VUVLX) – This fund has posted an average annual return of about 7.25% per year since its inception in July of 2000. Its annual expense ratio is 0.29% and it currently holds over $950 million in assets.

Delaware Pooled Large Cap Value (DPDEX) – This fund has accumulated almost $90 million in assets since its inception in February of 1992. It has also posted average annual returns of just over 10% per year since then and has an annual expense ratio of 0.68%.

Vanguard Russell 1000 Value Index Institutional (VRVIX) – One of the few small-cap value funds around, this giant has over a billion dollars under management and boasts an annual expense ratio of a mere 0.08%. Although it was only incepted a few years ago in September of 2010, it has posted an impressive average annual return of 17.8%.

Robeco BP All Cap Value Investors Fund (BPAVX) – This fund was incepted in July of 2002 and has posted average annual returns of almost 12% per year. The annual expense ratio is 0.95% with net assets of just over 170 million dollars.

See also The Cheapest Mutual Funds for Every Investment Objective.

The Bottom Line

Value oriented mutual funds can provide conservative investors modest growth over time with a lower level of risk and volatility than growth funds. Most of them also offer a measure of current income from dividends, which can improve their total returns significantly in some cases. Although there are times when some of the holdings in these funds do not achieve the price that is expected, they still stand as an attractive alternative to more aggressive offerings that carry substantial risk and volatility.

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