Investment Management strategies
The term investment strategy refers to an investors plan to guide their investment decisions. According to Investopedia "Investment strategies can differ greatly from a rapid growth strategy where an investor focuses on capital appreciation to a safety strategy where the focus is on wealth protection. The most important part of an investment strategy is that it aligns with the individual's goals and is closely followed by the investor".
Investment strategies are an important part of any investor’s crucial portfolio where an individual is planning to meet his financial goals. Precisely there are two types of investment management styles:
- Active management strategy
- Passive management strategy
In this part of Basics 2.0, we shall explore the theme of active management strategy of money management; its significance and its various characteristics:
Active management is nothing but an attempt to outperform the market by a certain benchmark or a particular index. In active management strategy, the fund manager’s decisions are influenced by prevailing market trends, company specific fundamentals, economic and political events. Precisely, it is the art of market timing and stock picking. The fund manager builds and oversees a mix of portfolio that seeks to outperform certain benchmarks, after charging a certain fees. Some of the commonly adopted benchmarks by Indian equity mutual fund managers are S&P BSE 200, Nifty 500, Nifty 50, S&P BSE 500, etc. For example, a large cap stock fund manager would look to beat the performance of the S&P 200 Index. The believers of active management do not abide by efficient market hypothesis and intend to profit from certain mispriced stocks.
Advantages:
The possibility of higher than the index returns is one of the biggest draws towards active management. The expert analysis of the fund manager helps him make proactive judgments based on their experience and knowledge. Managers can also take defensive measures if they foresee a downturn in the markets.
Disadvantages:
Higher fees and operating expenses may pinch the investors; especially when the performance is subpar. The risk of managers making unwise choices; hampering the returns are equally challenging in this style. The fund manager may have a certain approach or a style which may be in or out of favor with the market. Investment strategies employed by active managers include:
- Top down approach
- Bottom up approach
- Value investing
- Growth investing
In the next post of Investment Management strategies, we shall be discussing the Top Down and Bottom-Up approach.
