What's Your Style?

Why does an investor choose a particular fund to invest in and not any of its peers? What makes a good fund good? The very basic answer to these questions would be: the fund's returns. However, a more in-depth and composite answer would be: the fund's portfolio. It is the portfolio that defines what kind of returns the fund will achieve. It is the portfolio that makes or breaks a fund.

Doesn't it then make more sense to choose a fund after having studied its portfolio? But that's a lot of figures and statistics to go through, understand and comprehend. Not everyone can grasp things like P/E ratio, P/B ratio, market capitalization and other absolute measures. Such measures have to be drawn into a conclusion to understand what they mean. And the more the stats, the better the conclusion. Phew! Seems like tough work. Well, it is tough work, but you don't have to do it. We'll do it for you. To make things easier, we provide you with a snapshot of your fund: the Value Research Fund Style. Every fund has a collection of stocks in its portfolio that gives the fund a distinct style. The Value Research Fund Style simplifies things by giving a unified snapshot of how a fund's portfolio looks when compared to others.

The Fund Style is a nine-grid matrix that represents an equity fund in terms of its market capitalization and valuation. The market capitalization refers to the total value of all the shares of a company. Larger and better-established companies have higher market cap, while smaller companies have lower market caps. Large-cap shares are usually more stable, and the smaller company shares are usually more volatile and less liquid. The vertical scale of the Fund Style represents market cap, with the highest and lowest market cap on each end and the middle representing funds whose portfolios are dominated by mid-cap shares.

Apart from market cap, the Fund Style also tells you whether the fund's focus is on growth or value oriented stocks or a combination of both. In the growth investing style, the fund manager scouts for companies with potential of growing faster than others. A value investor buys into stocks, which are undervalued and have the hidden potential for turning around.

Typically, growth stocks have an above average P/E (price to earnings) ratio as well as P/B (price to book value) ratio. In contrast, value stocks have lower ratios. Growth stocks do well during periods of rapid economic expansion, while value stocks perform well during market downturns or in the initial stages of market recovery. A fund, which follows growth investing, will lie on the left column of the matrix and a value investing fund would appear on the right. A combination of these measures represents a fund's style in terms of market capitalization and growth potential. In India, most diversified funds prefer to have large-cap stocks and hence, 70 funds lie in this quadrant. As mid-cap funds have performed well recently, quite a few funds can be found in the middle row we well.

However, as share prices change, the fund portfolios will change as well, leading to a change in its style. The tool is reflective of the fund's current overall state and does not signify any exclusion. Thus, a fund's portfolio may have a large-cap bias but that will not mean that it does not have small-caps.

The Fund Styles of various mutual funds are shown in this magazine's scorecard. Check out what style your preferred fund has.