Mutual fund benefits are numerous. But what are the benefits of mutual funds?
When it comes to managing your finances, the sea of investment options can feel as unpredictable as the weather. Yet, with the right strategies and tools, navigating these waters becomes a thrilling adventure rather than a daunting challenge.
Investing is crucial for building wealth, and understanding various investment strategies can set you on the right course. One such versatile tool in your investment world is mutual funds, but before we see the benefits of mutual funds, let’s first understand different investment strategies.
What are the types of Investment Strategies?
1. Factor Investing
Factor Investing targets specific drivers of return across asset classes by focusing on characteristics or factors that can influence performance. Common factors here include the following:
- Value: Investing in stocks that are undervalued compared to their fundamentals.
- Size: Preferring smaller companies with high growth potential.
- Momentum: Investing in stocks that have shown strong performance trends.
- Quality: Choosing companies with strong financial health indicators like low debt and high profitability.
2. Momentum Investing
Momentum Investing is based on the premise that stocks or other securities that have performed well in the past will continue to perform well in the short term. Investors buy securities that have shown an upward price trend and sell those with downward trends. It’s like catching the wave of a rising stock and riding it until the trend starts to reverse.
For instance, if Company X’s stock price has risen from ₹100 to ₹150 over the past six months, a momentum investor might buy shares, expecting the stock to continue its rise. Over the next three months, if TechCorp’s stock price increases to ₹180, the investor might then sell to lock in the gains.
3. Smart Beta Investing
Smart Beta Investing combines elements of both passive and active investing. Unlike traditional index funds that mimic a benchmark index, smart beta strategies use alternative index construction rules to capture market inefficiencies.
Meaning they benchmark a group of stocks showing a similar characteristics –
- Low Volatility: Focusing on stocks with lower price volatility.
- High Dividend Yield: Targeting stocks with higher dividend payouts.
- Growth: Investing in companies expected to grow at an above-average rate.
Smart Beta Investing aims to enhance returns by focusing on specific factors like low volatility and high dividend yield.
For example, an investor might choose a Smart Beta ETF that targets stocks with these characteristics, expecting better risk-adjusted returns compared to a traditional market-cap-weighted index.
During market downturns, this Smart Beta ETF might perform well due to its focus on low-volatility stocks, while also providing steady income from high-dividend stocks.
4. Value Investing
Value Investing involves picking stocks that appear to be trading for less than their intrinsic or book value. Under this strategy investors look for companies that the market has undervalued, betting that their stock prices will eventually reflect their true worth.
It focuses on finding undervalued stocks.
Imagine Company Y’s stock is priced at ₹50, but its financial statements suggest its true value is ₹80. A value investor would buy shares, anticipating that the market will eventually recognize the stock’s true worth. Over the next year, if Company Y’s stock price rises to ₹75, the investor can either sell to realise a profit or hold for further appreciation.
5. Income Investing
Income Investing aims to build a portfolio that generates a steady income through dividends or interest payments. Investors often focus on bonds, dividend-paying stocks, and other income-generating assets.
6. Index Investing
Index Investing involves buying a portfolio that mirrors a specific index, such as the S&P 500. This strategy is based on the belief that it’s difficult to outperform the market consistently, so investing in an entire market index is more effective. It is also known as Passive Investing.
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7. Contrarian Investing
Contrarian Investing is based on going against prevailing market trends. In this strategy investors buy stocks that are out of favour and sell when they are highly favoured, believing that market overreactions can create opportunities.
How can investors choose the right strategy?
No investment strategy is suitable for every market condition as they come with their own set of benefits and disadvantages. However, investors can also choose to combine strategies for better returns on investment. Here is an example: Combining Momentum and Value Investing can also be effective.
Consider a retail company, whose stock price has increased from ₹20 to ₹30 in the last six months, yet remains undervalued with an intrinsic value estimated at ₹50. An investor using both strategies would buy shares, expecting the stock to continue its short-term rise due to momentum, and eventually reach its intrinsic value. In the short term, if the retail company’s stock rises to ₹40, the investor might hold onto the stock for further gains, recognizing its intrinsic value is still higher.
However, none of these strategies will work, if an individual’s financial goals are not first identified. Every investor has individual financial goals. Whether you’re saving for retirement, a child’s education, or a dream vacation, goal-based planning is essential. It’s about aligning your investment strategy with your specific objectives. This approach ensures that your financial journey is as smooth as possible, with your investments working towards your desired outcomes. Goal-based planning is one of the important benefits of mutual funds.
Use this tool, to start planning your investments to reach your desired goals –
In order to achieve your goals in a sound and efficient manner, Mutual funds can be your best friend. Whether you’re a fan of factor investing, momentum investing, or smart beta investing, there’s a mutual fund tailored to your strategy.
By pooling resources from multiple investors, mutual funds provide access to a diversified portfolio managed by professional fund managers. Read more about mutual fund investing here
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So why mutual funds? Benefits of Mutual Funds
The answer to why we should invest in mutual funds is simple. The answer lies in the comfort of not getting involved in manually implementing your preferred investment strategy. There are numerous benefits of mutual funds which we have described below:
Diversification
One of the key benefits of mutual funds is diversification. Investing in a mutual fund means spreading your investment across a variety of securities, reducing the risk associated with individual investments. It’s like having a fleet of ships instead of just one, ensuring that even if one encounters rough seas, the others keep sailing smoothly.
Professional Management
When you invest in mutual funds, you’re essentially hiring a professional crew to manage your investments. Fund managers are experienced professionals who analyse market trends, perform thorough research, and make informed decisions to optimise returns. This expertise is especially valuable for those who may not have the time or knowledge to manage their investments actively.
Liquidity
Mutual funds offer high liquidity, meaning you can easily buy or sell your fund units at the current net asset value. It ensures that you can exit the market swiftly if needed.
Cost Efficiency
Investing in mutual funds can be more cost-effective than buying individual securities, thanks to the economies of scale.
Mutual funds come in various types, catering to different investment needs and risk appetites. This is one of the key benefits of mutual funds. So, whether you’re looking for growth, income, or a balance of both, there’s a mutual fund for you.
Wrapping up!
Investing is a journey, and understanding the right strategies is crucial for reaching your financial goals. Whether you choose factor investing, momentum investing, or smart beta investing, aligning these strategies with mutual funds can enhance your investment experience. The benefits of mutual funds, from diversification to professional management, make them an excellent choice for both novice and experienced investors.
As you set sail on your financial journey, remember that investing in mutual funds can provide the stability and support you need.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch here: Investing In Passive Funds
Start investing through a platform that brings goal planning and investing to your fingertips. Visit kuvera.in to discover Direct Plans of Mutual Funds and Fixed Deposits and start investing today.
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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.
