For any kind of mutual fund, there are a variety of investment strategies that you can use to ensure lesser risk and better profits. In this article, we’ll explain how the popular mutual fund investing strategies work.
Value Investing
Value investing is one of the most widely adopted and respected kind of stock market investing strategies. This strategy involves finding stocks whose values are genuine and with stock prices that are either undervalued or at least not overvalued. Such stocks tend to be less prone to drastic price slumps.
The classic value investing metric used to identify undervalued stocks is the price-to-book ratio. Value investors gravitate towards P/B ratios of at least 3, and ideally lower.
On the other hand, since the average P/B ratio can differ greatly among sectors and industries, analysts usually evaluate a company’s P/B value in relation to that of similar companies doing the same kind of business.
Value investing goes beyond a company’s P/B ratio, however. A company’s value may exist in the form of having strong cash flows and also relatively little debt. Another sign of value lies in the specific products and services that the company offers.
Contrarian Investing
In a nutshell, contrarian investors go against the flow of the prevailing market sentiment or trend. One very common example of contrarian investing is selling short. It can also be done by avoiding buying the stocks of an industry when there are bullish forecasts across the board.
In other words, contrarian investors are those who buy what the majority is selling and sell what the majority is buying.
Since contrarian investors buy what others are selling, they can be seen similar to value investors. The difference is that contrarian investing is driven more by market sentiment while value investors heed more fundamental factors like the P/B ratio.
Contrarian investing is usually misunderstood as simply selling stocks or funds that are going up and buying stocks or funds that are out of luck. But that’s an oversimplification. Contrarians usually go against prevailing opinions instead of simply going against prevailing price trends.
Momentum Investing
Momentum investing tries to profit from following strong existing trends. Momentum investing is closely related to a growth investing approach. Metrics that are considered in evaluating the strength of a mutual fund’s price momentum include the weighted average price-earnings to growth ratio of the fund’s portfolio holdings.
Good mutual funds for investors who use momentum trading strategies can be spotted by looking at fund descriptions in which a fund manager clearly states that momentum is a primary factor in his or her stock picking process for the fund’s portfolio.
Investors who want to follow the market momentum via investments in mutual funds can analyze the momentum performance of different funds and then proceed to choosing the right fund for them.
Momentum investors can also search for sectors or industries that are showing clear signs of strong momentum. After determining the strongest industries, they invest in funds that provide the most beneficial exposure to companies engaged in those industries.