A long time and regular mutual fund investor would be well aware of the risks and rewards associated with investing in equity mutual funds and the various types of equity mutual funds to invest in like large cap, mid cap, sectoral etc. depending upon the funds’ investment philosophy.
In each of these above mentioned categories of funds, the performance or success of the fund largely depends on the fund manager’s efficiency in taking investment calls and managing the market, liquidity and downside risk etc. Let us understand the basic fund management styles adopted by the equity mutual fund managers and the assumptions made in each of them.
- Value Investing Style – Here the fund manager invests in companies whose current market value is perceived to be less than the company’s net worth and those of its peers. The fund manager makes use of fundamental analysis techniques like P/E, Price/Book value etc for valuation.
- Growth Investing Style- The fund manager invests in stocks of companies which are expected to perform very well. The basic premise is that if the company’s earnings exceed the analysts’ estimates, it would result in an appreciation in the stock price. The shares of such companies usually display high volatility in price movement just before the earnings announcement.
- Momentum Investing Style – The fund manager invests in shares which are market favourites, have strong “buy” recommendations and are not concerned with its intrinsic value or fundamentals. They believe that as long as the stock continues to exceed expectations and gives good results, its price will rise.
Since all these basic investment styles are different in nature, it is important to be aware of the fund management style of the equity funds you have invested in as it would help you to measure the performance of the fund relative to a suitable benchmark, and also effectively diversify your equity portfolio among different funds with contrasting investment styles.