Finding the right mutual fund

Strategies for managing your mutual funds

Purchasing mutual funds can be a wise way to invest your money. Designed to be both effective and convenient, mutual funds can form an integral part of your investment plan.ᶲ

There are two key advantages for mutual funds. First, by their nature, they are formed from a pool of money gathered from many investors to buy stocks and securities. That combined buying power can help with scale and diversification of investments.

Second, they are professionally managed with a qualified eye watching over them to optimize growth and value. Equity mutual fund managers will use a number of different approaches in selecting the stocks that make up a fund. Understanding these styles can help you choose the types of funds you're most comfortable with.

By choosing funds with different styles, you can diversify your equity portfolio by more than just asset class and geography. Here are some of the most common mutual fund management approaches.

Top down investing

Top-down managers start by looking at the big economic picture, seeking out industries and sectors that are likely to do well at a particular stage of the business cycle. Once the analysis is complete, they select leading stocks in the most promising sectors and weight those sectors more heavily in their portfolios. Top-down managers of international funds will also look for countries and regions with the best prospects for investment growth.

Bottom-up investing

Bottom-up managers focus on the quality of individual companies when they are selecting stocks. They look at fundamentals such as the price/earnings ratio, debt/equity ratio, earnings per share, and the overall soundness of the company's balance sheet. They may also engage with company executives and visit the company's facilities to help evaluate specific stocks.

Value investing

Value managers search for bargains – stocks that trade for less than their intrinsic value. They look for investment opportunities with underemployed or undervalued assets or for companies with low prices relative to earnings, book values, or dividends. The strategy is to buy undervalued stocks before the market recognizes their true value and drives prices up.

Growth investing

Growth managers look for companies with the potential for greater sales, earnings, and stock prices. Growth funds are usually more volatile than value funds, offering the potential for bigger gains or losses.

Sector rotation method

Sector rotators focus on timing the market. They will stack their portfolios with stocks from sectors that they believe are about to outperform, then rotate out of those sectors when they peak.

Momentum method

Momentum managers look for upward trends in a stock or a sector. They buy stocks once they see clear upward movement, ride the trend to the top, and then sell when the inevitable downtrend starts.

Investing styles are just a diverse as the market. There is no one style that's best for all investors or market conditions. Look for professional guidance to help select the types of funds that best suit your goals, preferences, and comfort level.