Common strategies of mutual fund managers
Past performance of the mutual fund is one of the major performance parameters of a mutual fund. Though it is not prudent to take decisions just based on past performance. So what does this past performance shows? Past performance shows how the mutual funds have performed over a period of time. In other words, we may say that past performance is the result of the decisions taken by the mutual fund manager. Mutual fund managers follow certain investment strategies. Different fund managers follow different investment strategies and here are some:
1. Top-down investment strategy
Top-down investment strategy runs from the top, i.e. overall economy, all the way to the bottom, i.e. a particular stock. This means that in this strategy fund manager first analyses the overall economy, based on which the fund manager screens out the favorable sectors and then moves on to analyse individual stocks post analyzing sectors.
2. Bottom-up investment strategy
The bottom-up investment strategy is simply the opposite of the top-down investment strategy. Bottom-up investment strategy runs from down, i.e. individual stocks, all the way to the top, i.e. the overall economy. This means that first individual stocks are selected based on certain parameters, then the sectors are analysed and in the end, the overall economy is analysed to know whether it is favorable or not. Among top-down and bottom-up investment strategies, the top-down investment strategy is usually preferred.
3. Fundamental analysis
Fundamental analysis involves analysis of an individual stock based on various factors such as the financials of the company, corporate governance of the company, etc. This can be termed as understanding the complete anatomy of the company.
4. Technical analysis
Technical analysis involves the analysis of an individual stock based on major technical indicators i.e. price and volume. Technical analysis is looking at the historical prices and how it has performed over a particular period. This is based on the principle of, History repeats itself.
5. Contrarian investment strategy
Contrarian investing involves selection of stocks which are currently not in favor. Fund managers determine whether the stock which is currently not in favour is undervalued and whether it has good growth prospects in the future. In the long-run, contrarian investment strategy and beat the benchmark provided the right assets have been chosen at the right time.