Picture a client who walks into your office holding a printout of an equity fund that has consistently outperformed the Nifty 50 over the last three years, only to notice it has lagged significantly in the last six months. They are worried, questioning whether the manager has lost their touch or if the fund is fundamentally broken.
As an MFD, you recognize this is rarely about a decline in skill, but rather a shift in the market cycle where the fund’s inherent style—be it growth or value—has fallen out of favor. Helping your client distinguish between a permanent loss of quality and a temporary cyclical mismatch is a fundamental part of the professional guidance you provide.
Growth-oriented funds focus on companies expected to grow their earnings at an above-average rate compared to the market. In bull markets or periods of economic expansion, these funds often lead the way because investors are willing to pay a premium for future earnings potential. However, when interest rates rise or market sentiment shifts toward safety, these high-valuation stocks are often the first to face correction.
Conversely, value funds seek out companies that appear undervalued relative to their intrinsic worth, often trading at low price-to-earnings or price-to-book ratios. While these funds may underperform during exuberant rallies, they often provide a cushion during market corrections or periods of economic stagnation.
Consider the practical application for an MFD when building a portfolio. If you place a client entirely in high-growth, high-beta mid-cap funds, they might panic when the inevitable cyclical reversal occurs. By understanding that growth and value styles perform differently across various phases of the economic cycle, you can construct a more resilient, blended portfolio that doesn’t just rely on a single market narrative. This is where your value as an MFD becomes clear.
By explaining that the fund hasn’t changed its philosophy—only that the market’s current preference for valuation has shifted—you provide the behavioral coaching that prevents clients from liquidating at the bottom.
While direct plans often highlight their lower expense ratios, they cannot provide this context during a market dip. Your role involves active communication, ensuring the client remains committed to their long-term goal rather than reacting to short-term underperformance. A well-constructed, diverse portfolio across different styles ensures that when one segment faces a headwind, the other provides the necessary stability to keep the client on their financial journey.
Nuance
Check Your Understanding
An MFD observes that their client’s portfolio, which is heavily invested in a Growth-oriented equity fund, has significantly underperformed the benchmark during a period of rising interest rates and market volatility. What is the most appropriate professional explanation to provide to the client?
Which of the following best describes the historical performance relationship between Value and Growth investment styles across different market cycles?
This is a companion read for Section 12.3 — Scheme Selection based on investment strategy of mutual funds from Ace the NISM Mutual Fund Distributors Exam by Akhilesh Gururani, available on Amazon Kindle.
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