A stock mutual fund that primarily holds stocks that are deemed to be undervalued in price and that are likely to pay dividends. Value funds are one of three main mutual fund types; the other two are growth and blend funds.
Every large mutual fund family has a value fund component in which funds are often broken down by size. For example, a fund family may include small-, mid- and large-cap value funds for investors to choose from. The premise of value investing is that the market has inherent inefficiencies that enable companies to trade at levels below what they are actually worth. In theory, once the market corrects these inefficiencies, the value investor will see the share price rise.
A common misconception is that value investors simply seek out stocks with low price/earnings ratios. Although this can be a characteristic of an undervalued company, this is not the sole feature that astute value investors seek.