When you take on the task of picking stocks for your portfolio, you need to use a variety of technical and fundamental factors. The same goes for picking stocks for mutual funds.
But, just like a mutual fund manager, you need to understand the goals of your funds when you pick stocks.
Different kinds of funds have varying investing goals and risk levels.
Picking Stocks for Index Fund
As the name suggests, index funds track a specific index. Index fund managers need to apply a highly passive investment strategy. That’s because the fund’s goal is to match the benchmark index’s returns, not outperform them.
To do this, the index fund invests in the same assets as the underlying index. Any stocks selected by the manager, thus, must be included on the index’s assets.
Picking Stocks Dividend Funds
Investors who want to supplement their income without much effort typically like dividend funds, which are created to generate the largest dividend yield possible annually.
To do this, stock pickers must choose stocks with the best dividend histories and highest payouts. That means sticking to companies that have paid consistent or increasing dividends for a specific number of years. They can also attempt to pinpoint which corporate gains are ready to issue special dividends.
Picking Stocks for Growth Funds
Growth funds are for long-term gains for shareholders by investing in companies expected to increase in value over time.
The managers of these funds search for companies that are still growing, with the potential to general larger revenues.
Many growth funds are aggressive, so stock pickers must choose stocks based on how quickly the company is anticipated to expand.
Growth funds also often trade securities very actively. Most of the time, the funds choose stocks or options ready to have a sudden spike in prices. Then they sell them after the initial price jumps.
Picking Stocks for Value Funds
Value funds also focus on companies with potential for bigger valuations. However, the strategy of value fund managers is to choose stocks that are currently undervalued by the market.
Value funds largely invest in undervalued assets where the current price is low when compared to the company financial health or dividend payment history.
Thus, stock pickers usually search for stocks with financially sound fundamentals at a bargain price, whether because of changes in consumer opinion, a lackluster earnings report, or other reasons.
Picking Stocks for Arbitrage Funds
Arbitrage funds are a relatively new type of mutual fund, also known as alternative funds. They use some of the strategies employed by riskier hedge funds to generate higher gains.
Arbitrage funds try to capitalize on the price differential between identical securities on different markets. The strategy needs the fund to simultaneously buy and sell similar holdings of the same asset on different markets or exchanges.
The goal is to benefit from price differences coming from market inefficiency.
Arbitrage fund managers try to generate returns. On the other hand, the type of fund and the investment goals of its shareholders are the primary factors deciding how each manager picks stocks in the fund’s portfolio.
The key to success is awareness. That’s why you need to go and check Finance Brokerage educational websites available. And you can choose the one that suits you the best in the Online Trading Courses offered.