A common scenario MFDs face is the client who asks why his ’top-performing’ fund suddenly lagged during a market recovery. He may own a growth-oriented fund that surged during the bull run but is now suffering because his expectation of perpetual high-speed earnings growth met a reality check.
Conversely, another client might complain that his ‘value’ fund is moving like a tortoise, completely unaware that the fund manager is intentionally buying companies trading below their intrinsic value, waiting for the market to correct its pricing error. As an MFD, your task is to identify these styles to ensure your client’s patience matches the manager’s strategy.
Growth investing is centered on the promise of future expansion. Managers practicing this style look for companies with high earnings growth, strong revenue momentum, and a scalable business model, often willing to pay a premium price for these qualities. For an Indian investor, this typically means exposure to sectors like IT services, consumption, or specialized manufacturing where growth rates consistently exceed the GDP growth.
However, because these stocks are priced for perfection, even a minor disappointment in quarterly results can cause a sharp decline in share price. This is why growth funds often exhibit higher volatility; they are driven by market sentiment and the future ‘story’ of the business.
Value investing, by contrast, is the pursuit of bargains. The manager acts like a shopper looking for a quality asset that is currently ‘on sale’ due to temporary market pessimism, sector rotation, or bad news that the market has overreacted to. In the Indian market, this often involves finding well-managed public sector enterprises or commodity players that have strong balance sheets but are currently ignored by the broader market.
The risk here is the ‘value trap,’ where a stock remains cheap indefinitely because its underlying business model is fundamentally flawed. When you recommend a value-style fund, you are essentially asking your client to bet on a mean reversion.
Selecting a fund purely based on its last one-year return is a dangerous shortcut that ignores these structural differences. As an MFD, you bridge the gap by explaining that a growth fund is essentially a momentum play, while a value fund is a contrarian commitment. Your role in providing regular reviews and behavioral coaching is what helps clients stay invested through these cycles, justifying the inclusion of professional guidance within the regular plan structure.
By aligning the client’s temperament with the fund’s underlying investment style, you transform performance fluctuations from a source of panic into a predictable part of the portfolio journey.
Nuance
Check Your Understanding
An MFD is reviewing a client’s portfolio that consists of a fund focusing on companies with high P/E ratios and strong earnings growth projections. Which investment style is the manager of this fund likely following?
Which of the following describes a key risk for an investor in a ‘Value’ style equity fund?
This is a companion read for Section 10.3 — Drivers of Returns and Risk in a Scheme from Ace the NISM Mutual Fund Distributors Exam by Akhilesh Gururani, available on Amazon Kindle.
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