A mutual fund is an investment vehicle made up of a pool of money collected from the savings of many investors for the purpose of investing in different securities such as stocks, debts, bonds, etc. Mutual funds are an indirect investing. The individual investors invest in the mutual fund which in turn invests in different securities in the stock market like shares, debentures, bonds, etc. Investors have no direct claim on these securities. The proportionate fund given by an individual investor is represented by the number of units owns by the investor of concern mutual fund. Profits of mutual funds are finally distributed among its investors on the basis of their individual contribution made in the specific scheme of concern mutual fund. Thus, the mutual fund gives an opportunity to small & individual investors to access the professionally managed portfolio of equities, debentures, bonds and to participate indirectly in capital market with their small savings.
Mutual funds are managed & supervised by qualified, experienced & professional investment manager also known as “Fund Manager”. Fund manager plays an important role in the performance of mutual funds. Fund manager uses his expertise and creates a portfolio for the mutual fund by investing the funds into different securities. He is individually responsible for maintaining and making an investment decision for the fund’s portfolio. The primary objective of the fund manager is to keep the savings of investor’s safe and providing them returns in terms of capital growth and income so that they achieve their financial goals. The fund manager keeps a sharp eye on each & every market fluctuation, changes in different sectors/ industries, government policies, interest rates, major corporate news, dividend declarations by corporate. Fund manager follows all the necessary compliances and rules set out by governing body like SEBI or RBI.
Now the question arises that, how the fund managers manages their funds so that fund achieves its objectives and able to provides a great return to its investors at minimum risk. Fund manager applies different investment strategies according to current market conditions by selling the existing securities and make investment in new securities from time to time. Following are some of the investment strategies followed by top fund managers to manage their funds and to fulfill their objectives:
- Momentum Investment Strategy: Under the momentum strategy, the fund manager buys & sell the stocks according to the strength of the recent price trend. He purchases those securities that have been showing an upward price trend (bullish trend), i.e. having high returns in past and sells those securities that have been showing a downward trend (bearish trend), i.e. having poor returns over the same period. This strategy assumes that recent trend of stock prices will continue in the future, for short to intermediate time horizon, in same direction until the recent trend loses its strength.
- Contrarian Investment Strategy: Under contrarian strategy, fund manager go against the prevailing market trends or current market sentiments and buys those stocks that have poorly performed in recent & when most investors are selling those stocks and sell those stocks whose performance improves & when others are buying it. Contrarian fund manager enters in market for a particular stock when other are feeling negative & bearish about it and start selling that specific stock which increase the supply of that stock in the market and push the price of a stock below from current market price and thus provides the opportunity for fund manager to buy the cheaper stock. On the other hand when any stock’s performance start improves, and other investors feel positive & bullish about it and they start buying it which increase the demand of that specific stock in market and pushes its price up in the market over its current market price and thus provides the opportunity for fund manager to sell the stock at higher prices. This strategy works for long term time horizon.
- Top-Down Investing Approach: This strategy can also be known as EIC (Economy–Industry-Company) analysis. Under the Top-Down investing approach, fund manager analyze first macroeconomic variables of the global & domestic economy, then he analyzes different sectors/ industries in the domestic economy and then different companies within different sectors/ industries. He select the industries and sectors to make his investment according to conditions of global & domestic macroeconomic variables and then select the top companies to make an investment within the selected industry or sector.
- Bottom – Up Investing Approach: Under Bottom-Up investing approach fund manager start from analyzing the stocks based on the strength of an individual company. Once the company has been selected then the fund manager will start to analyze how the company will perform in comparison to other companies under the same sector. After that fund manager analyzes how the selected sector will perform in coming macro economic conditions of the country.
- Value Investing Strategy: Under value investing strategy, the fund manager selects those stocks which are trading less than their intrinsic value. The rationale behind this strategy is that the demand of undervalued stock rises because other investors also interested to buy the undervalued stock which increase its demand and pushes the stock price upward, i.e., towards its intrinsic value which provides an opportunity for the fund manager to earn excess return who has to buy the stock when it is trading below its intrinsic value. Fundamental analysis is the main primary tool used for value investing strategy to find out the undervalued stocks in stock market.
- Growth Investing Strategy: This strategy is opposite to value investing strategy. Under this strategy, the fund manager invests in those companies that exhibit the sign of above-average growth in their earnings in compare to its industry in coming future. Fund manager under this strategy looks for those companies who reinvest their profits in the acquisition of some big capital asset or for expansion of their business rather pay out dividends to stock holders. Thus strategy focuses more on capital appreciation rather than annual income or dividends. Generally, the share price of growth companies appears expensive. This strategy can provide impressive returns if the companies are successful. However such companies are also at high risk.
- Growth At Reasonable Strategy (GARP): This strategy is a mix of value & growth investing. This strategy is most commonly used by many top fund managers. Under this strategy fund managers looks for stocks of those companies which shows consistent earnings in their growth and can deliver above-average growth in comparison to its industry, but are not selling at overly highly valuations, i.e. that are not too much expensive.
- Long Only Investing Strategy: It is an investing strategy in which fund managers only go for holding long positions in assets & securities. This strategy will do well during the bull market, but will likely not do well during a bear market. The return under this strategy is mainly in terms of capital growth. This strategy take years to deliver the results. The logic behind long-only investing strategy is that the riskier an asset, the more it will pay off at a later date. This strategy requires much patience therefore it is not suitable for those fund managers who do not have much patience to wait for years to gain the returns on their investments.
- By Analyzing Different Fundamental Ratios: Top fund manager analyze different fundamental ratios like: Debt-Equity ratio, P/E ratio, EPS, DPS, Book Value Per Share, Dividend Yield ratio, Current ratio, ROA, ROI, ROE and many others of different companies from time to tome and take his investment decisions and make appropriate changes in his fund portfolio on the basis of these ratios. These different fundamental ratios helps fund managers to select those stocks which have a strong long term growth prospectus and can provide good returns at minimum risk.