What if I say there is a way to achieve Warren Buffet-like growth of your savings without lifting a finger? Sounds too good to be true? Well, buckle up! In this article, we'll unveil two funds that follow Warren Buffet's winning principle, generating wealth at an impressive rate similar to his. And here's the best part: you don't have to do the hard work like Buffet did to grow his fund. We'll break down the research in the simplest terms, ensuring you grasp every valuable insight without getting lost in financial jargon."

You might agree with me when I say that nothing can surpass the long-term returns of equity investments compared to other asset classes like gold, real estate, or debt funds. However, even if you acknowledge that equity mutual funds are the best investment option, you might wonder where to invest within the realm of equities. With numerous equity funds available, the question arises: which one is the best choice?

Do you know how Warren Buffet amassed most of his wealth? It was through the value investing technique taught by his guru, Benjamin Graham. Warren Buffet's secret to creating such enormous wealth was investing in solid intrinsic value companies for the long term. He famously said, "Be fearful when others are greedy and greedy when others are fearful," emphasizing his contrarian approach to investing.

This strategy has become so popular that every investor is attempting to follow in his footsteps, generating significant returns that outperform benchmark indices.

Personal insight:-

Why this story? Four to five years ago, I was an avid trader and trainer in the derivative market. While I thoroughly enjoyed teaching people how to trade, the harsh reality was that less than 10% of my students were able to turn a profit. This realization struck me: active trading isn't suitable for everyone, but investing in a solid value business can generate wealth for all. With that same mindset, today we will discuss two consistently outperforming value-oriented mutual funds worth investing in: "ICICI Prudential Value Discovery Fund" and "SBI Contra Fund." Both are excellent choices, but let's uncover the best of the best.

Before I delve further into the deep sea of Value Investing Mutual Fund analysis, let me provide a brief explanation of what value investing entails in just two sentences.

What is Value Investing?

In simple terms, value investing involves seeking and acquiring stocks that are priced below their true value, with the anticipation that their prices will increase in the future. It revolves around seizing opportunities for undervalued gems in the stock market.

Introduction to the Funds:-

The "ICICI Prudential Value Discovery Fund" has been in existence for almost 19 years. With growing investor interest in value investing, the fund's Assets Under Management (AUM) have significantly increased. The AUM of this fund is Rs. 29,319.24Cr, which accounts for approximately 30% of the total AUM in the "Value MF Category" in India.

According to fund manager S. Naren, they have begun investing more in energy, healthcare, and communications sectors. They see greater demand in these sectors due to recent events such as the Russia-Ukraine conflict (leading to an energy crisis), COVID-19, and the rise of remote work. They generally target sectors with hidden value that may appreciate in the future.

The "SBI Contra Fund" is an almost 24-year-old fund managed by Mr. Dinesh Balachandran and Mohit Jain since May 2018. The fund has an AUM of Rs. 10,564Cr. The SBI Contra Fund adopts a contrarian approach by investing in stocks that are out of favor or undervalued by the market. Dinesh Balachandran has done an exceptional job managing the SBI Contra Fund during his tenure, leading to outstanding performance that surpasses market expectations.

How long should one hold these funds?

To maximize returns through Value Investing, the key is to exercise patience and hold the fund for the long term. If you have a long-term investment horizon and are willing to wait for a minimum of 3-5 years, this fund is ideal for you. While these types of funds may not perform at their best during short-term phases, they have consistently proven their ability to outperform others in the long term.

Does it beat the benchmark indices (Nifty 500, Nifty 50) in its returns?

Yes, both funds have outperformed the Nifty 50, Sensex, and Nifty 500 across all return durations, including 1 year, 3 years, 5 years, and 10 years. Many people assume that investing in a value fund doesn't make a significant difference in a growing market like India. However, the historical performance of these two funds proves otherwise.

Now, let's make a simple comparison with the Nifty 50 index. (We have considered direct and growth plans for this analysis.)

Note: Both of the value-oriented funds have outperformed the Nifty 50 Index in the long term. The SBI Contra Fund has shown remarkable performance since Mr. Dinesh Balachandran and Mr Mohit Jain took over the fund.

What is the potential concern for ICICI Prudential Value Discovery fund:-

Generally, funds that allocate more towards midcap and small cap funds are expected to generate higher returns in the long term, as these segments tend to have a higher growth rate.

Now, let's compare the fund composition of these two funds based on market capitalization.

In the image above, we can observe that the SBI Contra Fund has strategically allocated a significant portion of its portfolio to mid-cap and small-cap funds. This allocation has played a crucial role in delivering higher returns over the past 3-5 years.

However, as the ICICI Prudential Value Discovery Fund's assets under management have soared to nearly 30,000 Crores, they face a challenge in allocating a larger share of their capital to the mid-cap and small-cap segments due to liquidity constraints.

In contrast, the SBI Contra Fund, with an AUM of only 10,000 Crores, enjoys the flexibility to maintain a favorable allocation in the small-cap and mid-cap segments, potentially reaping the benefits of their long-term growth potential.

Power of Compounding?

If you had invested 10 lakhs when the ICICI Prudential Value Discovery fund was launched 19 years ago, it would have grown to almost 3 crores today. In contrast, if you had invested the same 10 lakhs in the Nifty, it would have generated 1.66 crores, which is nearly half of what the Value Discovery fund would have provided in returns. Isn't this fascinating?

Now, tell me the cost of investing in this?

I assume that you are only investing in Direct plans (It is wise to invest in direct plans as there is no commission involved from a distributor).

There are primarily two costs to consider: Expense ratio and Exit Load.

(Expense ratio refers to the annual fee charged by a mutual fund to cover its operating expenses.

Exit load is a charge imposed by a mutual fund when an investor sells or redeems their units before a specified minimum holding period.)

In terms of cost, the SBI Contra Fund appears to be cheaper, but considering the track record, the higher expense ratio charged by the ICICI Prudential Value Discovery Fund seems justifiable.

Note: We consider any total expense ratio below 1.5% to be good.

Is it worth the risk?

The metric "Sharpe Ratio" can better answer our question: "Is it worth the risk?" The Sharpe ratio of a fund provides insight into the excess return generated for each unit of risk taken. The higher the Sharpe ratio of a fund compared to the benchmark (BSE500, as mentioned in the table below), the better. Additionally, the fund should outperform its category as well.

When evaluating the ICICI Prudential Value Discovery fund, if we examine the 3-year Sharpe ratio...

For the SBI Contra Fund, the Sharpe ratio has outperformed both the category and the benchmark index (BSE500).

What does the above table say?

Since both funds have higher positive Sharpe Ratios than the Index, it indicates that the funds are generating greater returns relative to the risk involved. Additionally, the risk-reward ratio appears to be better than both the benchmark index and the category. (Please refer to Morningstar.in for more information.)

Disclaimer:-

We are not a SEBI registered Investment Advisor. This is not a recommendation but only a case of sample analysis that might help you to do research on various Mutual Funds.

Conclusion

Based on the above analysis and additional observations, the ICICI Prudential Value Fund has demonstrated a minimal drawdown (negative return) of -5.84% during challenging times, while the index experienced a larger decline of -10.65%. This indicates that the fund adopts a defensive approach and carries lower risk by investing more in quality large-cap stocks.

On the other hand, the SBI Contra Fund has consistently maintained higher returns with a comparable downside drawdown risk of -5.89%.

In summary, both the SBI Contra Fund and the ICICI Prudential Value Fund can be considered as viable investment choices. However, based on our evaluation, we lean towards the SBI Contra Fund for its strong performance, lower downside risk, and potential for future growth through its focus on value-based mid-cap and small-cap stocks.

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