In a crowded market, fund houses aim to launch products with labels that are ‘unique’; this sometimes leads to confusion. Read on to decipher what these fund labels really mean.
In order to differentiate their products from the plain, vanilla diversified or sector funds, fund houses come up with varied product labels. Often driven by the conviction of their fund managers that superior investment results can be produced by adapting different investment styles and approaches, these funds seek a place in your portfolio.
Growth Style
In growth investing, fund managers seek to invest in companies with strong competitive positions or expanding market opportunities with above-average profits or earnings growth. They often look for those companies that are well placed to exploit long-term growth trends that may drive earnings higher.
The growth style of investing is considered to be more aggressive than value investing and can generate superior returns during a healthy economic environment. Since fund managers invest in these stocks at higher valuations, a setback to the company or below par earnings could impact the stock price considerably. This style is better suited to aggressive investors.
Value Style
Under this style of fund management, fund managers mainly invest in equities which are undervalued and exhibit the potential to deliver superior risk-adjusted return in the long-term. These managers invest in companies which are trading at deflated prices due to market exaggeration and exhibit characteristics such as lower-than-average price-to-book, price-to-earnings ratios or high dividend yields. This style is better suited to conservative investors.
Opportunities Funds
The fund managers of these funds primarily invest in equities/sectors which demonstrate good growth opportunity with an aim to outperform plain vanilla equity funds. These equities/sectors are selected on the basis of their capability to capitalise on opportunities that arise from the changing economy, various economic reforms and from those sectors that drive the economy. Usually these funds’ investments are theme or sector (or a combination) specific though they seek to minimise risk arising from pure sector and market-cap based funds. Like ‘growth’ funds, these funds are meant for investors looking to generate superior returns with higher risks.
Contra Funds
As the name suggests, contra funds take investment decisions against the general market, i.e., when everybody is bearish on markets, the contrarian will turn bullish and vice-versa. They endeavour to benefit by going against the market herd and staying long in such equities until the herd favours them, resulting in an uptrend of the share price. Investors need to be cautioned that this category is riskier than conventional diversified funds.
Multi-cap or Flexi-cap Funds
In this category of funds, the fund manager largely invests in equities spanning the entire market capitalisation spectrum. Though a few do indicate their allocation to large, mid and small cap stocks, mostly they are indistinguishable from a regular diversified fund.
Dividend Yield Funds
These funds predominantly invest in equities which have and are expected to have a high dividend yield. These scrips are believed to provide an opportunity for capital appreciation by unlocking the potential growth of the price due to under-pricing in spite of its cash generation. These funds are expected to safeguard wealth in a falling or bearish market and hence are better suited to risk-averse investors.
So, which one is the best?
A Cafemutual study of the funds in these categories (except growth) reveals that over the last five years, it is only the dividend yield funds category that has a fairly consistent record of outperformance against the Sensex. It is a mixed bag for other fund categories.
Two other things stand out in the study. One, irrespective of the label of style, individual fund manager’s skills are important. Two, certain market conditions work in favour of certain styles. For example, value and dividend yield funds generally are better at protecting capital erosion in bear markets.
Should you recommend any of these funds?
Before you recommend any of these funds, you must study the styles and develop a proper understanding. Also, it is best to build a core portfolio around the more conventional diversified funds with these categories being used as mere toppings.