The sentiment of the market has changed noticeably in FY25-26. Investors whose portfolios were dominated by small- and mid-cap funds are now rethinking their moves. This is owing to the dampened appeal of the categories due to high prices, unpredictable earnings, and volatility. Amidst this, value funds that focus on fundamentally strong yet undervalued firms have gained traction. These funds focus on stability, income, and long-term growth.
As the market picks up, investors are shifting to value-oriented portfolios that provide added safety. In a recovering market like ours, investors have started choosing resilience over hype.
What Sets Value Funds Apart?
Value funds stand out not just for their strategy but for what they bring to a portfolio. . These funds invest in firms trading below their true worth, often including industries such as banking, energy, utilities, and manufacturing. Value funds have given 22.53% returns in the last 5 years.
These funds invest in companies with good fundamentals, a healthy balance sheet, and regular dividend payouts. They don’t buy into stories about disproportionate growth; instead, they look for the underpriced yet have long-term potential.
Investors are attracted to value funds due to the following reasons:
- Valuation Discipline: They avoid overhyped or heavily priced stocks.
- Income Generation: Most value funds invest in large-cap funds that pay dividends, offering cash flow even during market unpredictability.
- Defensive Strength: Value-oriented portfolios usually have lower beta, which helps them avoid big losses during market dips.
Many leading value funds, such as HSBC Value Fund and Axis Value Fund, hold diversified portfolios known for stability. They follow disciplined buy-at-a-discount strategies to build long-term strength.
Another example is the ICICI Value Discovery Fund that has proven to deliver consistently. It had a 5-year return of 25.81% as of August 30, 2025, which was better than the average return of 22.60% for its value-oriented peer group.
Investors are also utilising value funds as a stable base in their portfolios. Value funds provide balance without giving up long-term growth potential due to global recession, geopolitical instability, and uncertain profitability.
However, investors should consider their overall goals and risk appetite before investing. Some value funds may not reach their full potential for the long term. Thus, investors may need to stay invested for the long term.
The Market Outlook for FY26
As FY26 goes on, market conditions remain favourable for value investing. By July 30, 2025, India’s mutual fund sector AUM crossed ₹75.35 lakh crores, driven by healthy inflows in equity and hybrid funds. Equity AUM grew further via price gains, even as SIP contributions stayed strong.
At the macro level, GDP projections for FY26 are hovering around 6.5% with Q1 GDP at 7.8%, supported by resilient consumption, public spending, and improving credit flows. Valuations across large-cap sectors have also normalised.
Several former growth favourites now operate near long-term P/E average, and dividend-paying value stocks are gaining renewed attention. This, coupled with gradual foreign capital inflows into stable sectors like financials, sets a solid backdrop for continued value-oriented investing.
Conclusion
Small and mid-cap schemes still have a role in long-term portfolios, but not at full tilt. Value funds offer steadier income, modest growth, and better risk management. A balanced strategy would anchor a portfolio with core value-oriented and large-cap holdings, complemented by diversified and passive strategies, all supported by SIP discipline.
In FY26, the smarter move is not chasing short-term momentum but building long-term resilience, and value funds deliver just that.