Well well, I think this chapter is going to test your patience as much as it is going to benefit you. This chapter deals with mutual funds and a few related strategies to generate returns on your investments. At the end of this chapter, you will have a few practical strategies to implement which as per Peter’s book can generate decent returns over a long-term period.

Before I start with Chapter03 of this series, I suggest you read previous chapters below. Click on the link below:

Stock v/s Stock fund

In one respect, a stock fund is no different from stock. The only way to benefit from it is to keep owning it, which requires a strong will. Most of us do not try to understand the stock market, hence investing in it is fearful. This is because we fear things we don’t understand, agree?. Peter says, for people who are scared of stocks, investing in a stock fund doesn’t solve the problem and I tend to 100% agree with Peter on this part. Why so? Well because the best performing funds can decline more compared to an average stock in the stock market, and rebound harder than such stocks when the market is flying. One has to stay invested during an overall bearish market to benefit from the comebacks later. This brings me to the first basic strategy.

#1 People who can’t tolerate seeing their mutual funds lose 20-30% of their value in bear markets certainly shouldn’t be invested in growth funds or general equity funds. Perhaps they should choose a balanced fund or an asset allocation fund.

Now most of us while picking a mutual fund often tend to be confused about which fund to choose. This is majorly because there are around 5000 funds that are offered by different fund houses. Yes, you just can’t go out and play enee meene minie mow with the choices. You have to diversify. Diversification is necessary to distribute and minimize risk.

#2 Buy several funds of varying styles and philosophies.

The main rationale behind this is:

  1. Markets change and conditions change. One kind of manager or one kind of fund will not succeed in all seasons.
  2. Anything that can go wrong by investing in just one stock, can also go wrong by investing in just one fund or rather one type of fund.

As long as you are picking a fund, you might as well pick a good one!

Peter Lynch

Different funds have different characteristics. These characteristics are nothing but the fund’s style of investing or picking stocks. Read Types of Mutual Funds to know more. Peter shares the best of his knowledge about the behavior of different funds, I have tried to put his words below.

Value Fund

» Can outperform for 3yrs and awfully underperform for next 6yrs.

» Managers invest in companies whose assets, not their current earnings are the main attraction. For example natural resource companies, companies that own real estate, cable-network companies, pipeline companies, etc.

Quality Growth Fund

» They can lead the market but they can lag behind as well.

» Managers invest in medium sized and large companies that are well established, expanding, and increasing earnings by 15%. This cops out cyclicals, slow growing, and utilities.

Emerging Growth Fund

» Managers invest in small cap companies that lagged the market.

Capital Appreciation Fund

» This fund has no specific theme, no specific strategy and no particular philosophy.

Special Situation Fund

» This invests in stocks of companies that have nothing common in particular except that something unique has occurred to change their prospects.

#3 All-Star Strategy » For an average investor, in a simpler way you can divide your portfolio into say 6 parts and invest in each of the fund types mentioned above. Plus utility or balanced fund for ballast in a stormy market.

#4 All-Star Strategy + Two Index Funds

#5 Two Index Funds + Two Value Funds + One Capital Appreciation Fund

Approach…

✭ Easy Approach

Divide you money in equal parts and then invest in different types of funds. Pick anyone strategy from above.

✭ Sophisticated Approach

Dynamically adjust the weightage of various funds based on your knowledge and depending on market conditions. Put new money into sectors that lagged.

Remember…

Before taking any decision, first try to know what kind of fund you own. This will help you to take informed decisions as to whether or not you should stay invested in the fund or switch to another fund.

Once you know what type of fund you own, most of things can become clear. You can compare your fund with similar types of fund to decide whether to stay invested or hold or add or sell.

When a fund does perform poorly, the natural temptation is to want to switch to a better fund. People who succumb to this temptation without considering what kind of fund that failed them are most probably making a mistake.

Try to read the semi-annual/annual reports to determine whether the fund manager is buying stocks that the fund is supposed to buy, or whether the manager is deviating from the strategy of the fund. If the manager is deviating from the strategy of the fund then it might provide short-term returns but long-term wise it can not be fruitful for the investors of the fund as much as the similar type of funds.

Too much switching swapping…

Since most of us have to worry about tax implications and consequences, it’s not a good idea to do a lot of switching around by buying or selling among funds.

With that point, I am concluding the Chapter03 here. Please do comment below on how did you like this series till now. Share your opinions and thoughts. This will only motivate me to present more such content to you. Happy Investing!