What's cricket got to do with equity funds investing — this expert explains

Investing in equity mutual funds can be overwhelming, especially with the plethora of options available. Many investors often focus on performance metrics, such as returns, while neglecting a critical aspect — the investment style of the fund manager.

Nilesh Naik, Head of Investment Products at Share.Market, emphasises the importance of understanding this element.

Naik states, “The process is everything; the outcome is nothing.”

He draws a parallel between investing and cricket, illustrating how different conditions can impact performance.

For instance, a cricket team with three fast bowlers may struggle on a spin-friendly pitch, just as certain investment styles may underperform in particular market conditions.

“Just like different bowlers have different styles — leg spin, off spin, fast  —fund managers also have their unique investing styles,” explains Naik.

These styles can include quality investing, where managers focus on companies with strong profitability and low debt, or value investing, which targets stocks trading significantly below their intrinsic value.

Additionally, momentum investing focuses on stocks with rising prices.

Over the past few years, Naik notes, momentum and value investing have outperformed many other styles.

However, he cautions against assuming that this trend will continue. “Ignoring underperforming funds that follow different styles may not be the best approach,” he warns.

When building a mutual fund portfolio, Naik argues that understanding the investment style of your fund manager is crucial.

“Just as cricket teams mix fast and spin bowlers for a balanced attack, investors should diversify their portfolios with funds that employ various investment styles,” he suggests.

This diversity helps mitigate risks and can enhance the potential for returns in varying market conditions.

Naik acknowledges the difficulty of predicting which investment style will excel at any given time. He advises investors to maintain a balanced approach, incorporating funds with different styles to safeguard against market fluctuations.

“If you have a strong belief in a particular style’s potential, you can lean towards those funds, but having an exclusively focused portfolio is risky,” he adds.