For a truly diversified portfolio, don’t ignore investing styles

Diversification in mutual funds is usually discussed in terms of asset classes (equity, debt, gold, etc) or market capitalisation. What’s often ignored is diversification across investment styles – growth, value, and factor investing, to name a few.Growth investing tends to do well when the economy is expanding and confidence is high. Fund managers who employ this style back companies that reinvest aggressively to expand, and tend to grow earnings faster than their peers.

These stocks often trade at premium valuations because investors are willing to pay more today for the promise of faster earnings growth in future. However, this style of investing is not without its challenges. When growth expectations falter even slightly, richly valued stocks can plummet as optimism unwinds.Value investing works differently.

It tends to do well when there is an economic recovery following a period of uncertainty. The focus is on businesses trading below their intrinsic worth, often because of temporary challenges. As conditions stabilise, these stocks tend to rebound, delivering steady, sometimes outsized returns.

The post-2008 recovery and the initial months after the covid shock were periods when value investing did better. But value investors must also endure long stretches of underperformance until their stocks are back in favour.For investors looking to blend styles, flexi cap funds are a natural starting point. With the freedom to invest across market capitalisations and sectors, fund managers in this category can express their investment philosophy clearly.