Till recently, mutual fund investor were often confused about the schemes they should select to put their money in. To help investors select the right fund and also to ensure that the fund houses stick to the charter of the scheme, in October Sebi had started a process of recategorisation of MF schemes.
According to top industry officials, often it is found that if investors are given too many choices, they may not even select any. Another observed phenomenon is when there are too many choices the investor may end up selecting the wrong scheme. Both these phenomenon in turn could be detrimental for investors to meet their financial Goals. “Often investors are found to have a decision fatigue if they are offered too many choices,” said a top official at a domestic fund house.
So while there are financial planners and advisors who select the right schemes for investors, at times even the fund houses try to help investors select the right fund or the right combination of funds. Among Equity schemes, there could be various ways of selecting the right fund. One could a combination of funds by market capitalisation like large cap, mid cap, small cap and multi cap; it could be a combination of styles of investing, like value, growth and growth at a reasonable price (GARP), or it could also be based on some themes or sectors, like MNC funds, agri funds, IT and bank sector funds.
Among the three styles of investing, value investing is a style under which stocks of companies are selected which are available below their intrinsic values but has the potential to grow. Fund managers who follow this style of investing look out for stocks which are seen to be undervalued. These fund managers believe that the market often over-reacts to news on either way, good or bad, which lead to distortion in stock prices and do not correspond to the fundamentals of the companies which in turn give opportunities to make profit. Growth style of investing, in contrast, is an investment style that primarily aims at growing the value of the fund’s portfolio by buying stocks of companies whose profits and earnings are expected to grow at a rate that is more than the market rate of growth.
The third style, GARP, is basically a combination of the growth and value styles of investing. This style was popularised by legendary fund manager Peter Lynch. Within this style of investing, the fund manager looks to buy stocks of companies which are comparatively undervalued and also have strong growth potential.
At times, rather than investors looking for either value, growth or a GARP style of investing, or even a combination of the three, fund houses themselves offer to investors a bouquet of funds or even each fund separately so that the investors can easily select the one or the combination they want, fund house officials said.