Let me ask you a key and fundamental question related to making Investments.
What is the most fundamental truth encompassing the whole gamut of Investments?
Well, the answer might be simple, but its fallout is huge and determines how successful you are in making your investments work for you.
Actually, the fundamental truth underlying any sort of investment is that they are “Risky”. You cannot just determine their performance. You cannot be sure that your expectations will actually transform in reality giving you returns that you had expected.
This means that you should adopt a sound Investment strategy after analyzing the risk factors involved in your investment portfolio so that you stand at an advantageous position as far as your investments are concerned. Your sole objective should be to minimize the risks and lay a perfect platform for realizing good returns from your investments.
So if Mutual Funds constitute a key element in your Investment Portfolio, you have to make sure that you come up with viable Mutual Fund Investment Strategies so that Mutual Funds work for you. With Mutual Fund Investment Strategies, you can properly evaluate their performance and have a reasonable set of expectations from your portfolio of Mutual Funds.
Moreover with proper Mutual Fund Investment Strategy you are able to build your portfolio of Mutual Funds that happen to work together. The ultimate result is that you are able to invest wisely. With proper and adequate Mutual Fund Strategies you feel confident about your ability as an investor. So when you choose and pick Mutual Funds you should know what it does, and you should be in a position to articulate why you bought them and why you would be selling them. You should not be in a dilemma as to what you own and why you own.
Mutual Fund Investment Strategies to Get Most From Your Investment
So let us first understand the fundamental risks pertaining to Mutual Funds Investments and then get down to learn the key Mutual Fund Investment Strategies.
Understanding the Fundamental Risks
Actually Mutual Fund Investments are subjected to various (Investment) Risks as you just cannot expect to make returns when you take zero risk. The key lies in understanding these risks so that you can adopt and follow a viable Mutual Fund Investment Strategy.
So let’s see the Fundamental Risks in Mutual Funds Investment:
Concentration Risk – This risk arises when you hold a high percentage of Mutual Funds Asset Allocation in a single stock. It is also known as Individual Stock Risk. So, when the Mutual Fund has a stock position of over 10% in an individual company, it is considered vulnerable to returns. So, when you are betting on the stocks of an individual company, you are invariably bearing a high risk of investment. The market can fluctuate negatively, and a stock which is trading high (which you have chosen in your Mutual Fund Investment Portfolio), could tumble down giving you losses. So, if you are holding 20% weighting in stocks of XYZ Company in your Mutual Fund Asset Allocation trading at a high of $50 per share. The stock market can fluctuate leading the stock to tumble down to trade at $5 a share giving you enormous losses. So, you see there is an element of Concentration Risk when you invest in Mutual Funds.
Sector Risk – Besides single stock risk, there is an element of Sector Risk when you make a sizeable weighting in a single sector. Allocating a big chunk in a single sector in your Mutual Fund Investment runs big risks because it may happen that suddenly everything in that Industry takes a big dip. Generally, a Mutual Fund having more than 30 percent allocation in a single sector or industry is said to possess Sector Risk. As a wise Mutual Fund Investor, you should have diverse sectors in your fund so that you can ensure that a hit at one industry should not have an adverse effect on the value of your Mutual Funds.
Price Risk – Price Risk arises when a stock is traded at a high valuation. Any disappointing news in the stock market can crash the stocks bringing about huge losses. So, one should be careful in selecting stocks of companies for Mutual Fund Asset Allocation and should check that stocks are not traded at insane valuations.
Business Risk – At the core of every stock lies the inherent potential of Business Risk. The overall business conditions are responsible for driving the stock prices. It might happen that a business can lose its competitive advantage. The worse possible scenario is when the whole industry collapses. You require a lot of efforts, analysis, and research in order to avoid such scenarios.
Market Risk – Stock Markets are often volatile, and this brings in what is known as Market Risk. This is actually the risk of investing in the stock markets. Due to Market Risk, stocks happen to lose money occasionally. However, with a long term focus and diversifying your portfolio of funds, you can overrun the elements of Market Risks and can avoid the ill effects of occasional downturns.
Apart from the above risks, Investment in Mutual Funds runs risks such as Credit risk, Interest-rate risk, Currency risk, Liquidity risk and also Emerging-markets risk. By adopting and following sound, and viable Mutual Funds Investment Strategies you can minimize Investment Risks and prepare a portfolio which brings in good returns on your investment.
Having said this, you should align your Mutual Fund Investment Strategies according to your personality and investing experience. Each Investing strategy is not good for everyone.
Moreover, every strategy has its own merits and demerits. So every Investment Strategy has its ups and downs. Even the best run Mutual Funds are not immune to the downturn. There are years when they are in red and lag the overall market sentiment by a huge margin. However, a viable Mutual Fund Investing Strategy will help you in evaluating management, in assessing risk, and in understanding valuation.
So let’s now see some key Mutual Fund Strategies:
Deep-Value Strategy – This Mutual Fund Investment Strategy focuses on protecting against losses. When practicing this strategy you focus on buying cheap stocks. So, you go onto buy stocks of an undervalued company. The benefit of buying deep value stocks is that they don’t necessarily have to transform into big American Companies to come out as winners for you. This strategy makes sure that you protect your investment from a downturn pretty well, and stand a good chance of making decent returns. Thus going with deep value funds, you ensure that you have a low risk of investment together with market like returns. In the long term, deep-value stocks stand a good chance to outperform growth stocks. However, the key risk here is Business Risk. So, if the business is a dud, your investment takes a hit. From selling point of view, it’s a good idea to demonstrate patience and hold such stocks for a long tenor.
Momentum Investing – This Investing Strategy is the polar opposite of what we have seen in Deep-Value Investing. Momentum Investing springs from the observation that underlines the fact that stocks which register sharp rise, continue to rise for a while. Momentum Funds have the inherent capacity for delivering big returns, but they are very risky. Then it’s not easy to determine whether a fund is a Momentum Fund or not. Moreover, Momentum Funds are loaded with Price Risk. These funds show a track record of a wild mix of big gains and huge losses. It all depends on your analysis, research and timing to be able to net out profit by betting on Momentum Funds.
Great Companies at Fair Prices – This Mutual Fund Investment Strategy is the child of Warren Buffett, the greatest investor in history. This strategy advocates for paying a slightly high price in exchange for getting stocks of a better company. So, you would rather pay a fair price for a great company instead of paying a great price for a fair company. The reason is pretty obvious. A great company has inherent potential for compounding its earning at a fast pace over coming years. The compounding will pave the way for a good long term stock performance. So, buy stocks of a great company at a fair price and hold them for a long term to make huge returns from your investment. This is the central ideology behind this Investment strategy. You should be willing to invest for a long time horizon, for at least a period of ten years.
Market Timing Strategy – In the Market Timing Strategy, you rely on your skills of getting into and out of assets, markets, or sectors at the right time. The Market Time Strategy ensures that you buy stocks at low prices and sell them at a high rate. So, it’s all about timing the markets. Following this strategy demands that you should be driven by logic and reason rather than follow your emotions. If you are weary of market fluctuations, then you cannot just stick to this strategy. Moreover, you should be an experienced investor to be able to profit from this Investment Strategy. Buying stocks at the right time and selling them at the right time demands lots of patience, research and analysis from your side.
Buy and Hold Strategy – This is by far the most common Investment Strategy. The strategy springs from a general observation that markets usually rise 75 percent of the time and go down 25 percent of the time. So, when you employ this strategy and survive the upturns and downturns of the market, you end up making money 75 percent of the time. Moreover, it is always easy to buy and hold stocks. However, you need to demonstrate patience to weather through the ups and downs of the market.
Performance Weighting Strategy
In this Investment strategy, you revisit your mutual fund portfolio time and again and make necessary adjustments. Let’s take a simple example to illustrate this strategy. Suppose you started with an equity portfolio in four mutual funds splitting your investment of $100000 in equal weightage of 25 percent each. After one year of investing, some mutual funds will outperform others thereby shifting the equal weightage of 25%. Logic will dictate that you should dump the loser mutual fund which gave you least returns in favor of the winner which gave you the most returns.
However, Performance Weighing works the other way round. It relies on the constant that in investing everything runs in cycles. So here, you sell some of the funds that performed the best and buyout funds that netted worst performance. You go on repeating this process which implies that you take out the profit when a fund performs its best in order to buy a fund when it is down. So, in a way you re-balance your mutual fund portfolio year after year. When you go on re-balancing your portfolio year after year (say for five years), you stand to make a profit from your investment activity as a result of the following Performance Weighting Strategy. So, it’s all about re-balancing your portfolio year after year with discipline.
The Concluding Lines: So, once you have set up your Mutual Funds Portfolio, you require taking adequate steps in order to maintain it. By following the above mentioned Mutual Fund Investment Strategies, you can surely manage your portfolio of mutual funds. You go onto minimize the investment risks and also lay down a perfect platform for netting in big returns from your investments in Mutual Funds.