Monday, November 27, 2006

…On to Operational Classification…(3)

…On to Operational Classification

By Trading Strategy

Active Funds are constantly active in the market. They buy and sell the securities in their portfolio very frequently.

Passive Funds normally follow a buy and hold strategy and do not trade their holdings very frequently.

Balanced Funds are those that follow the middle path between the active and passive funds.

By Security Selection

Top Down Funds are those that select stocks using the top down approach, where the fund manager first identifies the sector in which he would like to invest and then the potential scrips within the sector.

Bottom Up Funds use the bottom up approach to investing, where the fund manager focuses on the scrips, irrespective of what sector they come under.

Technical Funds are those that use technical analysis to select scrips.

By Market Capitalisation

Small Cap Funds focus on small cap stocks (companies with a market capitalization of up to Rs 500 crore) for their investment portfolio. Mid-Cap Funds invest in mid cap scrips (companies that have a market capitalization between Rs 500 crore and Rs 1,000 crore). Small/mid cap companies tend to be under researched. Thus they present an opportunity to invest in a company that is yet to be identified by the market. Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations. But mid cap funds are very volatile and tend to fall like a pack of cards in bad times. So, caution should be exercised while investing in mid cap mutual funds.

Large Cap Funds are those that invest in large cap scrips (companies with a market capitalisation in excess of Rs 1000 crore). Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth. Investing in large caps is a lower risk-lower return proposition, because such companies are usually widely researched and information is widely available.

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