Mutual fund style boxes are visual tools, often presented in a 3x3 grid, to swiftly assess the fundamental features of a mutual fund's investment approach. These boxes classify funds according to market capitalisation (large-cap, mid-cap, small-cap) and investment style (value, blend, growth).
What is a Mutual Fund Style Box?
A mutual fund style box is a graphical representation of the characteristics of a mutual fund. Morningstar Inc., a provider of research on financial services, popularised this tool through its placement by a rating system for mutual funds, which ranks such funds between one and five stars. Consequently, many investors in mutual funds have been using it to choose and evaluate funds. Furthermore, a mutual fund style box also has several extra applications by which investors can categorise individual securities and funds while also understanding how to develop their portfolios.
How do mutual fund style boxes work?
The mutual fund style box’s vertical axis is split into three fundamental categories on the basis of market cap. For evaluations of mutual funds, the method for evaluating market cap ranks each mutual fund’s underlying stocks to work out the market cap of the fund.
Similarly, the horizontal axis of a mutual fund style box is segregated into 3 categories on the basis of valuation, and each mutual fund portfolio’s underlying stocks are reviewed. The price-to-book (P/B) and price-to-earnings (P/E) ratios that truly judge the health of a company are used for calculating and categorising each stock as blend, growth or value, wherein blend refers to those stocks that exhibit value characteristics and growth.
Example of mutual fund style boxes
The mutual fund style box comes in the format of a 3x3 grid and helps gauge the basic characteristics of the investment strategy of a mutual fund. The fund categorisation is based on the investment style (blend, value, growth) and market capitalisation (small-cap, mid-cap, and large-cap). The style boxes are used by advisors and investors for comparing several mutual funds simultaneously.
- Small-cap growth: Funds belonging to this category usually invest in smaller companies that have higher growth potential. Such investments are, however, riskier but may offer higher returns.
- Mid-cap blend: This includes funds that invest in medium-sized companies with a mix of value characteristics and growth. They offer a balance between large-cap stability and small-cap growth potential.
- Large-cap growth: Such funds mainly focus on large companies that are predicted to outgrow the market. They reinvest their earnings to enhance growth and usually do not pay dividends.
- Large-cap value: Funds belonging to this category invest in large companies that are generally undervalued. Such companies record stable earnings and are often the leaders in their industries.
By using style boxes, investors can diversify their respective portfolios by clearly identifying the size and type of stocks in each fund to better align with their risk tolerance and investment goals.
How to use a mutual fund style box?
The horizontal and vertical axes of a mutual fund style box are usable for classifying any given mutual fund into 9 basic categories: small value, small blend and small growth; medium value, medium blend, and medium growth; large value, large blend, and large growth. This particular system helps ascertain whether and how the investment fits into a portfolio. Certain investors use it to identify a particular fund for all categories, while others may concentrate on typical areas only. For instance, an aggressive investor is likely to focus on growth or small-cap funds. Hence, the fund's placement in the box not only helps in selecting long-term investments accurately, but historical data is also usable for verifying the overall consistency of the portfolio's holdings.
In keeping with the system developed by Morningstar to rate mutual funds, other assorted fund companies have started placing style boxes beside the system for star rating for marketing. The same mutual fund style box is usable for evaluating individual bonds and stocks. After all, these boxes have already been used for every underlying security of a particular fund before averaging the data to provide a fund-level rating.
Thus, beyond mutual funds, any research analyst can use the mutual fund style box to develop hypothetical portfolios combining several money managers. This helps high-net-worth investors see how a diversified portfolio can be created using singular managers. Moreover, historical data is also usable for running multiple scenarios that allow financial advisors, investors, and analysts to review the consistency and performance of blending capital managers in myriad ways along with separate securities.
International equity mutual fund style box
An international equity mutual fund style box helps categorise funds based on investment style and market capitalisation while also focusing on markets outside an investor's home country.
- Large-cap value: Makes investments in undervalued and large international companies with stable earnings.
- Large-cap growth: These target larger multinational companies with a high growth potential.
- Mid-cap blend: Mixes growth and value investments in international companies that are usually medium-sized.
- Small-cap growth: Focuses on high-growth but small international companies that offer potential returns and higher risks.
The tool helps investors to diversify globally and balance risk to align with their international investment strategies.
Conclusion
A mutual fund style box can indicate the potential risk of a fund and the returns it is likely to give on the basis of its category and the fact that different company sizes and sectors have separate volatility levels and growth potential. Categorising funds based on market capitalisation and investment style simplifies portfolio diversification to help investors make informed decisions that align with their risk tolerance and financial goals. Be it international or domestic equity funds; the style box is a visual representation that underscores the potential risk-return profile and investment strategy of a fund. The tool employs a structured approach to identify overlaps or gaps in the investor's portfolio to ensure a well-diversified and balanced investment strategy.
Moreover, a mutual fund style box can indicate a fund's potential risk and the returns it is likely to give based on its category and the fact that different company sizes and sectors have separate volatility levels and growth potential. Besides helping select investments, a style box also assesses the consistency of the money manager’s performance.
If you are an investor and want to start your investment journey, you can visit the Bajaj Finserv Mutual Fund Platform to learn more about mutual funds and SIPs. You can also use the lumpsum calculator and SIP calculator to calculate your financial goals.
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