I created a flow in which based on a decision, a picklist field is assigned the value. But instead of Assigning the picklist value i created, it is assigning true or false when i uncheck the 'restrict the picklist to the defined value'.

Oh ok i understand your mistake. 

VALID or INVALID descision elements are just name of decisions element it doesn't represent a value. you can't assign it like that. A decision element always return true or false. 

IF VALID Decision is ok -> true, if not -> false

IF INVALID Decision is ok -> true, if not -> false etc

You can simply write the value in your update statement.

Field                                  Value

Lead_Status1__c            VALID

but don't select decision element, just write VALID