FinAware

Market Capitalization represents the aggregate value of a company or a stock.

Market capitalization = Outstanding shares X Current price per share.

Eg. If XYZ company has 150,000 shares outstanding and a share price of 20 per share. Market capitalization of XYZ company = 150,000 (outstanding shares) X 20 (price per share) = 3,000,000. Market Capitalization is also represented as market cap. The market capitalization changes with time as a result of factors like:

• Company performance,
• Economic factors like inflation, interest rates, etc.

In India companies have market capitalization ranging from a few lakh to as much as few lakh crores basis which companies are usually classified as large-cap, mid-cap and small-cap companies.

Mutual Fund schemes invest across different market capitalization. There are schemes which invest purely in large cap companies, others which are mid and small cap oriented and also there are schemes which invest across market capitalization.

Stocks of leading and nationally known companies that offer a record of continuous dividend payments and other strong investment qualities.

Mutual Funds have schemes which invest in such bluechip stocks.

As the saying goes – 'Do not put all your eggs in one basket'.

This is best applicable in the world of investments. It is often said diversify to balance risk. Diversification in financial investments is a strategy to invest in different asset classes (gold, equity products, debt products, etc.) to minimise the risk of overall portfolio.

The objective of diversification is to lower the average risk of the portfolio. The positive performance of some assets will neutralize the negative performance of other assets in the portfolio. Thus, reducing the overall risk of the portfolio.

Mutual Funds invest in different asset classes like debt, equity, gold, combination of these, etc. Equity based funds too have a wide range of offerings like diversified equity funds, sectoral funds, etc. Likewise debt funds have investments in central government bonds, state government bonds, etc.

A benchmark is a point of reference by which something can be measured. In the financial world, performance of an investment product is usually compared to a benchmark performance over a period of time.

All Mutual Fund schemes have a benchmark. The return of every scheme is compared to the benchmark returns. Some of the prominent benchmarks are CNX Nifty, S&P BSE Sensex, 10 year T-Bill & CRISIL Short Term Bond Fund Index.

These are research methods basis which one can decide which company to invest in.

• Top-down Approach
In top down approach one begins with looking at the economic factors and situations like gross domestic product (GDP) numbers, interest rate scenario, the exchange rates, inflation and then see how these factors are going to affec a particular sector and in turn select the companies in that sector.


• Bottom-up Approach
In this, one goes exactly the other way. First identify a widely recognised company which is a leader in its domain. Look at individual factor like management, market share, debt, past track record, economic environment in which the company operates in, performance of peer companies in the same sector etc. which will have an impact on the company's performance in future.This is followed by sector selection and the broader macro economic view.

Both are methods of investing used to identify stocks suitable for investment.

Value Investing is about investing in a stock that is available at a discounted price relative to the price of another stock, either in the same sector or any other sector. Discounted price of a stock is not merely the price at which it is available but is relative to the intrinsic value it has to offer.

In simple terms, value investing provides an opportunity to purchase a stock, at a discounted value which holds a high potential value. growth investing is about investing in a stock which one believes has the potential to grow at a rate faster-than-average increase in share price over the coming years. The growth investment style identifies companies whose earnings are expected to grow faster than the broad market.

Mutual Fund schemes use either or both the methods of investing methods mentioned above to identify stocks to form part of the fund portfolio depending upon the investment objective of the scheme.