The investment strategy of the fund part 2

Investment objective: The mutual fund’s investment objective states what it aims to achieve i.e. capital appreciation, income generation among others. It could also inform the investor about the investment style of the fund and the kind of risk it is prepared to take for achieving its investment objective. Ideally, an investment objective should be pointed enough for the investor to understand whether his own investment objective fits well with that of the mutual fund. For instance, an investment objective that states that the fund will ‘attempt to generate capital appreciation by investing significantly in the mid cap segment’, it tells the investor that it is likely to be a high risk – high return investment. If the investor has the risk appetite for such an investment he can consider investing in the fund. 

Allocation of stock: Allocation of stocks by the AMC's are shown in the factsheet, the composition of portfolio are shown properly so that all those investor who have invested in the fund or those who wish to invest in the fund can get an proper view of the style of fund management by the AMC'S. When we look at the stock allocation of the AMC's we can judge the level of diversification by taking into consideration the top 10 stocks in their portfolio. We believe that if a fund has more than forty percent in the top 10 stocks than it is not properly diversified. In a volatile situation a fund which is well diversified will be more effective then sectorial flavor funds. Many times it is noticed that the whole portfolio is well diversified but one single stock is holding such a high investment that the balance of diversification cannot be maintained. This can turn out to be risky proposition for a pure diversified equity funds. 

Allocation of sectors: A well diversified equity fund need to be diversified not only on the basis of stocks but it need to be well diversified across sectors too. When we evaluate or analyze a fund it is not enough to evaluate the stock allocation but also the sectorial allocation. If a fund is not well diversified across sector it may get into trouble if there is a sudden crash in the market. While calculating the sectorial allocation, the investor must combine like-natured sectors to understand the level of sectorial diversification.