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Investment Styles
Each mutual fund typically employs an investment style as a framework for portfolio allocation. The capital market is comprised of a variety of securities, and an investment style aids fund managers in creating a portfolio that would meet the objective of a fund. Investment styles can be divided into two categories – value and growth.

Finding the hidden gem!

Generally, value-style managers look for companies that are trading below their fair value. Some companies may be undervalued because markets tend to overreact to news, resulting in price movement that may not reflect the long-term fundamentals of a company. Overtime, value managers expect the market to recognize the true worth of these companies. The idea is to select stocks that are trading at a heavy discount to reduce the margin of error in value estimation.

Pros & Cons

Since value stocks by definition trade at a discount, they may offer less volatility than growth stocks and could offer stronger performance during slower-growth environments. In addition, since prices do not move in tandem, value stocks and growth stocks can help investors diversify their portfolio.

Identifying value stocks can be a challenge since there is no foolproof method to determine intrinsic value. It is possible for two different fund managers to derive varying intrinsic values for the same stock. Commonly used parameters are price-to-book or P/E ratio. These ratios are typically compared to industry peers and lower than the average may be considered a value stock.

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