Equities represent one large umbrella in financial markets under which there are categories, subcategories, and investment styles assigned. One such style of equity investing is value investing, a strategy used successfully by business tycoon and billionaire Warren Buffett in the early 21st century. Simply put, value investing is based on selecting companies where the stock price does not reflect what an investor believes is the true value of the company, or a stock that is undervalued. An equity value fund includes a mutual fund that uses this investment style.
An equity value fund may be overseen by one or more portfolio managers. Investors put a certain amount of money into the fund, and those assets are invested by the fund managers. The value of the fund grows or declines based on the buy and sell decisions made by the professionals. In an equity value fund, these managers agree to hunt opportunities that fit a value investment strategy, in other words, stocks that present a long-term buying opportunity for investors. Investors can learn the investment style of a fund by reading that fund’s prospectus, or document filed with a financial regulatory agency.
The basis for value investing is to select stocks that are not being appreciated by investors. Value investors select stocks because the stock prices do not reflect the true value of the company. A value investor believes that, eventually, the stock will trade at a higher value, and by purchasing the stock when it’s undervalued, profits can be earned either in the near or long term.
One of the criteria for value investing is to understand the industry in which the undervalued stock trades. This knowledge allows an investor to justify why the equity investment is worth more than the stock price indicates, and it is why investing in an equity value fund can help generate profits. Professional money managers often have expertise in particular sectors and, at the very least, have access to a research team to assist in uncovering value stocks.
An equity value fund might be limited beyond value investing. Some mutual funds hunt not only value stocks but value stocks of a particular size or market capitalization, which is a measure of the value of a company based on the amount of shares available to trade and the price of the stock. An equity value fund might be tailored to include only small, mid-sized, or large cap value investments.