The criteria used by mutual fund managers when choosing their assets vary greatly depending on the experience and preferences of specialists. Therefore, when choosing a fund for investing money, you need to take time to study the investment style of managers and the mutual fund strategy. This will allow you to understand in advance whether you will understand the decisions of the managers and easily understand the general course of affairs. In addition, it is important to immediately find out if the Mutual Fund’s way of working complies with your risk / return ratio..
Investment style is incredibly important because it determines the principle of investment. The degree of risk tolerance and the expected profit depend on it. It is also associated with the diversification tools necessary to balance between risk and profit..
In this article, you will learn about six different investment strategies that fund managers follow:
• Top-down investing.
• Investing from the bottom up (Bottom-Up Investing).
• Fundamental analysis.
• Technical analysis.
• Opposite investment (Contrarian Investing).
• Dividend Investing.
Let us consider what these mutual fund strategies are based on and what advantages they have in comparison with each other..
Mutual fund strategies from top to bottom or from bottom to top
A top-down investment strategy involves asset selection based on large samples. For example, if the manager of a fund assumes that in the near future the economy expects rapid growth, he can buy shares in all directions. Or he acquires assets in certain sectors of the economy, such as IT technology or industry, reasonably believing that they win more than others during the general strengthening of the market.
If the manager expects the economy to fall, he is considering selling the most vulnerable sectors. Often the first items on the “on the fly” list are consumer goods and healthcare (people are starting to save on food, shopping and medicine).
Bottom-up managers work with individual companies. They calculate their prospects based on events in the general economy or sector to which the enterprise belongs..
“Top down investing has one simple advantage – you look at the whole forest, not individual trees. It makes stock valuation and action planning easier, ”said Mick Hayman, Independent Financial Advisor..
Of course, managers can be mistaken in their assessment of the overall economic picture. But, even if they make the correct assumptions, there is no guarantee that they will be able to select individual successful assets..
James Holtzman, a shareholder in Legend Financial Advisors, cites an example with gold: “When investing in a bottom-up strategy, you can invest, for example, in a gold mining company, but it may fail to develop a specific deposit. The shares of this enterprise will collapse, but in general, investing in gold will remain a lucrative occupation. “.
Asset management from bottom to top is many times more successful with careful research of individual companies. This requires expert knowledge. But even in this case, one can be affected by such a strong recession in the economy, in which even the most reliable assets will not stand.
Fundamental or technical analysis
Fundamental analysis involves the study of all factors affecting investment performance. For stocks, for example, this means viewing all of the company’s financial information. With sufficient insight into the issue, this may even require meetings with executives, employees, suppliers, customers and competitors. In the literal sense, you want to infiltrate a company to consider management, prerequisites for growth, goals, prospects, etc..
Technical analysis includes asset selection based on previous trading patterns. This means that you are looking at investment price trends..
Most fund managers prefer fundamental analysis because they want to know exactly what factors a company needs to grow. For example, investors expect a stock to grow because it makes a profit..
But fundamental factors do not always have full force. Any investor may encounter a period of time when the market, in all the attendant circumstances, moves according to technical parameters.
Mick Hayman believes that the advantage is on the side of technical analysis. He is convinced that the price of an asset at any time reflects all the information available about it. But, according to him, successful stock managers skillfully use data from both technical and fundamental analysis..
“If an asset has strong fundamentals, it must demonstrate steady growth. If this does not happen, the market hints to you that you are mistaken, and you need to focus on something else, ”says Mick Hayman.
Managers using the opposite investment method choose assets that are not in the best shape. They determine the general market opinion about a particular company or sector of the economy, and then bet against.
Such mutual fund strategies are usually correlated with a value investment strategy, which involves the acquisition of assets that are undervalued by the market.
“In the long term, for all stocks in the world, the price wins the growth rate, although it is inferior to them in certain periods. The opposite style of investing can be very profitable if the investor is able to correctly analyze and choose the moment to invest money, ”says Chris Gechi, director of the money management program at the Wharton School of the University of Pennsylvania.
Of course, there is always a risk that the general expectations of the market will come true, the bet made will be incorrect, and the fund manager will suffer losses.
As the name suggests, dividend funds buy shares with strong profits and dividends. Due to stock market volatility over recent years, many investors began to pay attention to funds offering regular payments..
“Even if the stock price falls, you at least get some income. It’s a good way to increase profits, especially if you’re retired, ”says Russ Kinnell, director of Morningstar.
However, the growing popularity of dividends makes some market experts worry about whether they are currently overvalued. Extremely high disbursement funds also pose a danger to investors. This may indicate that companies are taking excessive risks and are reducing.
Experts are inclined to believe that there are no universal or guaranteeing success investment strategies. You can stick to one idea and be very productive in it, or you can switch between styles, adapt to the current situation and concentrate on making as few mistakes as possible..
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