Invest In Aggressive Funds

Ali On Content / 21 Jun 2010

Expand your portfolio of mutual funds to enhance your returns. Here is an introduction to different kinds of mutual funds and their pros and cons for the right selection 

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Equity funds are emerging as an ideal investment vehicle for investors who intend to participate in the growth of the equity markets but do not have the wherewithal to do so. Since investing directly in the stock market requires knowledge to pick the right stocks, enough time and ability to monitor the happenings and events that could impact the stocks in the portfolio, more and more investors are turning to the professionals in the MFs. 

The right way to begin investing in equity funds is through diversified funds. Because these funds invest in a wide range of stocks across various industries and therefore provide stability to the portfolio. Since equity as an asset class has the tendency to be volatile over the short term, a portfolio consisting of diversified funds can go a long way in curtailing the impact of the vagaries of the stock market.  After building a reasonably large equity funds’ portfolio, an investor can take the next step of investing in some of the “aggressive” funds to enhance the overall portfolio returns. However, the decision to choose such funds and the extent of exposure would depend mainly on one’s risk profile. The key difference between these “aggressive” and “diversified” funds could be in terms of investment strategy/philosophy followed by the FM as well as the exposure level at the stock and at the industry level. Here are some of these funds:[PAGE BREAK]

Contra Funds
A contra fund is a contrarian fund that invests in out-of-favour companies but at the same time have unrecognised value. The reasoning behind is that sooner or later other investors will realise the true value of these companies and buy their shares, thereby increasing the stock prices. These are ideally suited for investors who want to invest in a fund that has the potential to perform in all types of market environments as it blends together for both growth and value opportunities.

Opportunity Funds
Though by definition diversified, opportunity funds are aggressive by nature. Their emphasis is on generating superior returns rather than risk containment. The downside of these funds is that there is a risk of the fund manager’s style becoming individualistic. There is also a danger of having over-exposure in a particular sector, thereby increasing the risk. The key, therefore, is to keep an eye on the portfolio composition on a regular basis.

Mid-Cap Funds
Mid-cap funds invest in mid-cap stocks. Each of these funds generally has their own definition of mid-cap stocks. Mid-cap funds are a good means to enhance returns and add growth to the portfolio. Investors with some appetite for risk should consider adding mid-cap funds to their existing mutual fund portfolio. ‘Existing’ here means investors must have a portfolio to begin with, preferably with large-cap diversified equity funds forming a substantial chunk.

Sector Funds
These funds are highly focused in that there investment  are aimed at a particular industry. The basic idea is to enable investers to take advantage of industry cycles. Since these funds ride on market cycles, they have the potential to offer good returns if the timing is perfect. However, sector funds should constitute only a limited portion of a portfolio as they are much riskier than a diversified fund.

As these funds invest in one industry or sector, they do not provide the downside risk protection available in a diversified fund.

Value Funds
A value fund invests in stocks that are deemed to be undervalued in price. Simply put, a fund manager following value investing tries to take advantage of the market inefficiencies that allows him to buy stocks at less than their intrinsic value. Even though there is a case of for an stablished investor to include some of these funds in the portfolio, it will be prudent to have a limited exposure to begin with. Your “bread and butter” funds in the portfolio should always be diversified funds.

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