Arnav Pandya is a Chartered Accountant and a management graduate from IIM Bangalore with a specialisation in Finance. He is also a Certified Financial Planner with experience of over a decade in the field of personal finance.Mutual fund schemes adopt a distinctive style of investment. Each specific style sends out a specific signal to investors, but in several cases the investment style is not even considered while making an investment decision.
There is a lot that the investment style can tell an investor and hence this requires adequate attention. Two prominent styles that are often followed include the growth style and the value style. Here is a closer look at these areas and the features that they actually represent.
Related to equity funds:
There are different types of funds in the market. The two distinct categories are debt funds and equity funds. There are completely different factors that are at work in each of these areas and hence they require a different style of operation. With thousands of stocks listed on the stock exchange the importance of the style of investing increases for distinguishing between equity funds. These often go on to impacting the returns earned from the schemes.
Growth style of investing :
One of the prominent features of any investment into equities is the expectation of a capital gain in the transaction. The kind of company that is selected for the investment is important because of the fact that its position in its industry and its performance will determine the price movement on the stock exchanges. In such a situation selection of companies that are growing rapidly is one way to structure the equity portfolio.
Selecting growth companies will mean that these entities are in a stage of rapid rise in their sales and net profit and hence the valuation that they get will be different from other companies. Usually such companies have a higher price earnings ratio because of the expectation of the rise in the profits in these companies. Selecting such companies seeks to gain through the rapid rise witnessed by the company and hence is called the growth style of investing.
Value style of investing :
The value style of investment is involved in the search for value among the various stocks in the market. Here the effort is concentrated in searching for companies whose value in the market is actually less than the intrinsic value of the business along with its potential. The whole strategy here involves a situation where the shares are bought at these low levels and then the fund manager waits for the market to recognize the value and this will lead to a rise in the share price.
This is often a long drawn out strategy that takes time to actually show results and hence there is a lot of patience required. There is also a danger that in many cases the actual value might not be realised at all in the market and hence this is a specific risk that is associated with the investment. At the same time if this strategy works out then the returns available for the investor can also be high
Mutual fund scenario :
There are a large number of funds that follow a growth style of investment especially among diversified equity funds. This is more popular because of the fact that it is also able to show returns to the investors quickly and this makes it popular. Also a portfolio based on this strategy is easier to explain to the investors as compared to the value investing style.
Some fund managers often follow the value investing style when they believe that this will yield returns in the coming time period. The returns are often huge from this strategy but with a high element of risk because the option has to work in order that the gains come in. There are also times when the market situation is such that there are no value options present for the fund manager and in such a situation they have to adopt some other strategy.
Understanding and knowing these options is vital for any investor to make their selection decision about particular mutual funds and hence they need to ensure that this check is done before a final decision is taken.
There are different types of funds in the market. The two distinct categories are debt funds and equity funds. There are completely different factors that are at work in each of these areas and hence they require a different style of operation. With thousands of stocks listed on the stock exchange the importance of the style of investing increases for distinguishing between equity funds. These often go on to impacting the returns earned from the schemes.
Growth style of investing :
One of the prominent features of any investment into equities is the expectation of a capital gain in the transaction. The kind of company that is selected for the investment is important because of the fact that its position in its industry and its performance will determine the price movement on the stock exchanges. In such a situation selection of companies that are growing rapidly is one way to structure the equity portfolio.
Selecting growth companies will mean that these entities are in a stage of rapid rise in their sales and net profit and hence the valuation that they get will be different from other companies. Usually such companies have a higher price earnings ratio because of the expectation of the rise in the profits in these companies. Selecting such companies seeks to gain through the rapid rise witnessed by the company and hence is called the growth style of investing.
Value style of investing :
The value style of investment is involved in the search for value among the various stocks in the market. Here the effort is concentrated in searching for companies whose value in the market is actually less than the intrinsic value of the business along with its potential. The whole strategy here involves a situation where the shares are bought at these low levels and then the fund manager waits for the market to recognize the value and this will lead to a rise in the share price.
This is often a long drawn out strategy that takes time to actually show results and hence there is a lot of patience required. There is also a danger that in many cases the actual value might not be realised at all in the market and hence this is a specific risk that is associated with the investment. At the same time if this strategy works out then the returns available for the investor can also be high
Mutual fund scenario :
There are a large number of funds that follow a growth style of investment especially among diversified equity funds. This is more popular because of the fact that it is also able to show returns to the investors quickly and this makes it popular. Also a portfolio based on this strategy is easier to explain to the investors as compared to the value investing style.
Some fund managers often follow the value investing style when they believe that this will yield returns in the coming time period. The returns are often huge from this strategy but with a high element of risk because the option has to work in order that the gains come in. There are also times when the market situation is such that there are no value options present for the fund manager and in such a situation they have to adopt some other strategy.
Understanding and knowing these options is vital for any investor to make their selection decision about particular mutual funds and hence they need to ensure that this check is done before a final decision is taken.
