Investing in Funds with distinct Investment Styles

Published On: 19-Jun-2020

Amidst the full range of mutual fund schemes available for the investors to invest in, it is paramount to analyse a mutual fund scheme objectively. The decision of the investors to invest in a particular mutual fund scheme is often driven by various parameters, including but not limited to the fund performance, consistency of the performance, size of the fund, etc. 

While one may not be inclined to check the investment style of a particular scheme before selecting the schemes, knowing that may effectively help the investors to check the suitability of the specific scheme to their financial goals and risk appetite. Different investment styles have distinctive features, thereby helping the investors to align their investment strategies with the desired investment style.

While Growth style investment and Value Style investment are the two broad categories, one may also find slightly modified variants in practice. Considering there are many variants, here are the four common investment styles: 

1. Growth Investing

Growth investing refers to chasing the high growth stocks in the expectation that such Growth will continue to be there for the business in the foreseeable future. As such, the fund manager may tend to pick stocks with higher earnings, higher price-earnings growth, higher dividend retention, etc. 

However, such growth potential may cause the growth stocks to seek extra premiums from the investors, and thus, they must pay a higher amount than the intrinsic value of the stocks to grab a pie of them. Such stocks will generally be mid-cap to large-cap stocks with a proven track record of performance and Growth. 

2. Value Investing

Value investing refers to the investment strategy, which aims to buy stocks ad securities at a lower price than that justified by their intrinsic values. However, it must not be misunderstood as an investing strategy to buy anything that comes cheap. Instead, it selects the stocks, which usually trade at valuations lower than what their fundamentals reflect. With eyes on the valuations, the fund managers tend to pick stocks that seem to be presently mispriced.  

The valuations may be lower due to several reasons, mainly being an exceptional event impacting the sector or any company, market sentiments, etc. The companies might be on the verge of a turnaround or steadily gaining momentum, which would push the valuations higher to the normal levels. However, value investing demands a lot of patience as the rerating of the stock may take a considerable time. Further, there also remains a possibility that the lower valuations of the company might be due to specific reasons. Thus, the valuations may not bounce back to normal easily. 

3. Blend Investing

As the name suggests, blend investing refers to a blended version of value investing and growth investing. It is also known as Growth at a Reasonable Price (GARP) strategy. The fund managers are inclined to select high-growth stocks in the portfolio. However, an additional criterion of picking the stocks only at a reasonable and fair price makes it a distinct investing strategy. 

Such investment style may pick the stocks based on the future outlook, but the value being invested might also be prioritised. This enables the fund managers to stay reasonable in managing the risk profile of the investment portfolio. 

4. Momentum Investing

Momentum investing denotes the investing decisions impacted by the recency bias. It assumes that the stocks that have performed well in the recent past will continue to do well shortly. In this regard, the investors must remember, past performance is not a guarantee of future returns; the historical performance in the equity markets may not be sustained in the future. 

The investors may check the investment style matrix for the mutual fund schemes under consideration. The horizontal axis in the style matrix for equity funds reflect valuations, while the vertical axis refers to the market capitalisation aimed by the fund. Similarly, for a debt fund, the investment style matrix reflects the credit risk and interest rate risk reflected by credit quality and fund duration, respectively.

While all the above strategies consider valuations and future potential, what makes the investing styles distinct is the weightage to different considerations. It becomes essential for the investors to pick the right mutual fund schemes to align their risk profile and financial goals suitably.