Value Funds: Investing in Undervalued Stocks - A Comprehensive Guide

A value fund is an investment vehicle that focuses its investments on one of two types of stocks: those that are considered undervalued based on fundamental analysis, or those that are considered value stocks. This later group of stocks is differentiated from growth stocks in many ways.

Blue Chips and Value Stocks

A typical value stock is a large cap stock that pays a fair dividend and is relatively stable. These are the stocks that you commonly hear referred to as “blue chips.” The thirty stocks in the Dow Jones Industrial Average are primarily value stocks. In contrast, a growth stock tends to be one that focuses on appreciating stock price and less on dividends. Growth stocks are more volatile, but offer greater return potential over the longer-term. While there are plenty of large cap growth stocks, they tend to have smaller market capitalizations.

Either a growth or a value stock may be considered undervalued. Depending on the specific metrics of analysis that you use, you may consider a wide range of stocks to be trading below fair value. A value fund, then, is either one that does this second type of analysis and buys those stocks, or one that buys value stocks.