Different Types of Investment Strategies 2024

In the previous chapters, we have learned about financial ratios and created a simple checklist to help you analyse stocks. However, the truth is that there is no one correct way to select stocks. The investing process can be different for everyone, which is why, in this chapter, we’ll explore the common styles or strategies of investing that are popular globally. 

Investing in the stock market can seem daunting, especially for beginners. With numerous options to choose from, it may get overwhelming to decide where to put your hard-earned money. However, having a clear understanding of the different types of investing strategies can help you make informed decisions aligned with your financial goals, risk tolerance and investment duration. This article discusses the most popular investing approaches - Value Investing, Growth Investing, Dividend Investing, Index Investing, Contrarian Investing, Momentum Investing, Rupee-Cost Averaging, Socially Responsible Investing and Buy and Hold strategy.

Value Investing

Value investing is a strategy pioneered by the legendary investor Benjamin Graham in the 1920s. He is regarded as the "Father of Value Investing", and his methods remain relevant for investors even today. The value investing approach analyses companies to find stocks trading below their worth. The fundamental belief is - that a stock's market price does not always equal its intrinsic value. By purchasing undervalued stocks and selling when the market corrects its valuation, substantial profits can be earned.

How Does Value Investing Work?

Value investors aim to purchase quality stocks at bargain prices. The disparity between market price and intrinsic value generally arises due to inefficient dissemination of all relevant information. Multiple factors like market overreaction, economic crisis or temporary problems in an otherwise robust company can lead to undervaluation. Value investors leverage this by buying shares of such companies and waiting patiently for the stock price to rise closer to its intrinsic worth.

The first step is identifying fundamentally strong companies with promising long-term potential that are undervalued. Extensive research analyses financial metrics like the P/E ratio, earnings growth, cash flows, etc. Qualitative assessment is also done to gauge management competence. Some signs indicating a value opportunity are - stocks with low P/E and P/B ratios, high dividend yields or crisis-hit blue chip stocks.

The next step is determining the intrinsic value, which becomes the reference to decide purchase and sell price points. Value investors seek a minimum margin of safety, say a stock available at 2/3rd of its actual worth. This cushion safeguards from potential misjudgments in valuations. The stock is purchased when the market price falls below the calculated intrinsic value, providing room for appreciation to realise gains. The final step is to book profits and exit when market dynamics also recognise that company's worth, causing the price to reach closer to its inherent value.

Advantages and Disadvantages  of Value Investing

Aspect	Advantages	Disadvantages
Potential Returns	Higher returns due to undervalued stocks appreciating towards their intrinsic value	Potential for lower returns compared to growth stocks if market sentiment doesn't improve
Downside Risk	Reduced downside risk because of "margin of safety" (buying below intrinsic value)	Lower potential for immediate gains
Investment Approach	Contrarian approach, avoiding overvalued stocks	A time-consuming process requiring fundamental analysis and patience
Holding Period	A longer holding period is required for the stock price to reach intrinsic value	It may not be suitable for investors seeking short-term gains

Growth Investing

Growth investing focuses on stocks witnessing faster-than-average growth than peers and overall markets. These companies mainly belong to rapidly expanding industries and tend to beat benchmarks. Instead of distributable cash flows, the focus is mainly on appreciating capital gains. Such stocks generally trade at premium valuations but can be helpful for investors seeking accelerated portfolio growth.

How Does Growth Investing Work?

Growth investors seek companies with a demonstrated track record of above-average growth in earnings, revenues or cash flows. The belief is such firms will continue to deliver similar outperformance due to competitive strengths. Some essential criteria for evaluating growth stocks:

1. Financial Trends: Positively growing top-line and bottom-line showcases business success and future readiness. Long-term patterns hold more relevance than only recent figures.
2. Industry Standings: Good rankings in terms of market share or leadership display a competitive edge that protects growth momentum.
3. Returns: Robust margins and Return on Equity profiles highlight profitability to convert growth into returns

For benchmarking, growth rates and metrics need to be above industry/market averages. Focusing investments in sectors witnessing economic tailwinds can maximise portfolio upside. Some evergreen spaces are technology, consumer staples and healthcare, which retain growth potential. Many growth investors consider parameters like earnings per share (EPS) and the PEG ratio for the relative valuation assessment of shortlisted stocks. Certain investment styles monitor insider buying or focus on small/mid-cap stocks with lower analyst coverage to unearth hidden opportunities.

The subsequent step is building a diversified portfolio spanning multiple attractive growth stocks. Rebalancing periodically to book profits or incorporate the latest outperformers keeps the portfolio aligned for the offence. The estimated price targets for trimming positions should factor in the business prospects and runaway trajectories certain growth stocks can display.

Advantages and Disadvantages  of Growth Investing

Aspect	Advantage	Disadvantage
Potential Returns	Superlative returns from higher benchmarks, beating earnings growth	Potential for lower returns compared to value stocks
Capital Gains	Focus on stock price appreciation to compound portfolio value	Lower potential for dividend income
Secular Companies	Exposure to industries with durable, long-term trends	Less diversification compared to broader market exposure
Overvaluation Risk		Risk of correction and losses if performance lags market expectations
Higher Volatility		May not be suitable for investors seeking stable returns

Dividend Investing 

Dividend investing aims to generate regular income by owning stocks of fundamentally strong companies and sharing profits through dividend payouts. These firms usually have long business histories, relatively stable end markets, and sufficient cash flows to return capital to shareholders. Hence, dividend stocks tend to deliver superior risk-adjusted returns with lower volatility.

How Does Dividend Investing Work?

Dividends represent a tax-efficient monetisation option for investors as only certain classes of dividends attract tax incidence in India. Hence, the post-tax yield from these stocks, comprising premium brands, becomes the starting point for evaluation. Two aspects merit attention – the dividend amount declared per share over a year and the corresponding dividend yield showcasing returns from just the income component. Steady or rising payouts year after year indicate financial robustness and shareholder friendliness. Dividend yields must also be considered in relation to interest rates, other investment avenues, or peer group metrics for relevance.

Investors should shortlist companies that have stood the test of time, command pricing power, run robust businesses and generate healthy cash flows to keep rewarding shareholders irrespective of transitory external challenges. Some pointers in this regard are as follows:

1. Consistent Dividend Payment History: Companies with demonstrated commitment to dividend payments establish reliability.
2. Dividend Growth Rate: Growing dividend amounts each year signal earnings strength and management’s positive outlook to sustain shareholder returns.
3. Low Dividend Payout Ratios: Retaining surplus earnings to fund expansion plans supports the continuity of future dividend potential.
4. Strong Financial Profile: Covers for unforeseen events and volatility in earnings that may hamper dividend-paying ability otherwise.
5. Business Defensibility: Business models with structural or intangible competitive strengths protecting growth and profitability lend stability to future dividend prospects.
6. Robust dividend: Paying companies keep enhancing portfolios during industry or economic downturns through higher yields and compounding. Hence, dividend investing proves rewarding for long-term investors seeking recurring income from their stock investments.

Advantages and Disadvantages of Dividend Investing

Aspect	Advantages	Disadvantages
Passive Income Stream	Dividends can supplement regular cash flow requirements or build a secondary income channel through automated reinvestments	Susceptibility to Cuts and Company’s Financial Health
Inflation Hedge	Rising payouts every year act as an inflation hedge for the income component from stocks	Lost Opportunity Cost of Capital Gains
Preference for Mature Companies	The focus on generators of surplus cash flows leads to investments in mature businesses with sound financials	Higher Investment Corpus required

Index Investing

Index investing aims for portfolio diversification by owning an entire index instead of attempting to beat benchmarks. It offers a low-cost passive investment option for participating in the economy’s growth through underlying index constituents spread across market caps and sectors. Index funds and ETFs allow accessing stock indices seamlessly. 

How Does Index Investing Work?  

Index investing success is rooted in the premise that markets display a rising long-term trend. Historically, key indices have delivered healthy returns with lower volatility despite intermittent corrections. Tracking indices through index funds eliminates stock selection challenges, manager biases or timing errors attempting to overtake broader markets.

Index investing simply means owning a basket replicating the chosen index's composition. For stocks, maintaining alignment with the weightage of individual scrips and their changes becomes necessary. As the index value appreciates with markets over long durations, linked investments also rise to match the returns. Instead of aiming to outsmart markets, the focus here is harnessing the inherent upside potential cost-efficiently. This becomes possible without incurring heavy fund management charges from active interventions to churn portfolios.  

Indices, such as the Sensex, Nifty50, sectoral indices, ESG benchmarks, global equity indices, and many more, cover a wide gamut today. Each index boasts specific pros like representing a broader economy, focusing on themes like ESG factors or tapping overseas markets. Investors can pick based on preference, like pursuing Indian equities, developed markets, dividend yield focus, etc. Index investing success rests on choosing an index aligned with the desired investment exposure and risk appetite. Over long investment horizons, harnessing markets’ momentum through indices builds substantial wealth.

Advantages and Disadvantages of Index Investing  

Aspect	Advantage	Disadvantage
Assured Diversification	Constituents spread across market caps and sectors rule out concentration risk.	No active choices or selection criteria
Low Costs	Index funds or ETFs have negligible fund management charges, given the passive strategy. This expands the investible corpus.	A broad representation may not allow investors to capture trends in different sectors or industries
Transparent Rules	A published, rules-based methodology for index building, stock additions/exclusions and maintaining weights offer reliability.	Despite simplicity and transparency, this style of investing may carry benchmark risk
Stock Selection		The investor doesn’t decide on stock preference, weightage, etc., but accepts the index methodology's constituents and weights as they are.

Contrarian Investing

Contrarian investing contradicts conventional market wisdom by going against the grain. Investor sentiment is fraught with emotions like fear, greed, etc., periodically leading to asset mispricing and presenting lucrative opportunities. Contrarians capitalise by buying when the economic outlook or company prospects appear bleak, while others sell. The premise is mean reversion, i.e. fundamentals should ultimately overcome the excessive pessimism or euphoria.

How Does Contrarian Investing Work?  

Market exuberance inevitably gives way to periods of panic, while despondency subsequently makes way for upbeat sentiments. Contrarian investors aim to profit from such sentiment cycles by positioning portfolios counter to crowd behaviour. The strategy needs to observe indicators of investor overreaction in either direction and then take an independent call. Signs indicating negative sentiment run too far and may include steep valuation cuts, overwhelming pessimism in analyst estimates, or intense aversion after controversies. Positive sentiment stretch signs could be lofty multiples, unanimous bullish projections and universal fancied status.

Some stocks tend to fall more sharply relative to intrinsic value during times of crisis. Contrarians will strategically accumulate such out-of-favour stocks if the underlying business model remains structurally sound. 

However, Timing precisely when stock prices get corrected remains challenging. Hence, contrarians refrain from aggressive positioning sizing and invest in a company over some months. The art of contrarian investing lies in balancing acting in advance and confirming key inflection points through catalysts like new product launches, regulatory changes, etc.  

Advantages and Disadvantages of Contrarian Investing

Aspect	Advantage	Disadvantage
Material Upside Potential	Higher price upside as market corrections offer great bargains.	Timing the market is may not be possible at all times
Outthinking the Market	An independent approach gives the investors a better probability to generate higher returns	Long waiting periods could create some missed opportunities
Cushion Against Herding Risk	Contrarian positioning acts as insurance during panic phases when most investors get trapped rushing out	Limited scalability. Investors cannot take the risk of investing a large allocation towards contrarian stocks

Momentum Investing

Momentum investing aims to profit from market dynamism by buying stocks that are already witnessing an upward price trajectory, hoping the surge has legs to sustain over medium terms. The belief is stocks rising steeply have built sufficient investor interest and display price strength capable of compounding portfolio returns further. 

How Does Momentum Investing Work?  

Momentum investors pinpoint stocks recording handsome returns over historical periods like 3/6/12 months. By piggybacking on the rising tide in identified outperformers, substantial gains can continue over the next few months. Techniques like identifying 52-week highs aid momentum pursuit during bull runs when benchmark indices also gallop. Tracking trading volumes, analyst recommendation upgrades, and relative strength indicators also assist in confirming price velocity sustenance before jumping onto the bandwagon.

However, chasing top gainers often proves risky if the momentum wanes soon, leading to sharp reversals. The key lies in ascertaining whether robust fundamentals support the rally through new product success, rising market share, industry upcycle, etc. Here, some indicators of strong underlying growth drivers are expanding profit margins due to premiumisation or operating leverage benefits, return ratios heading higher compared to the last few years, and consistent volume growth despite price rises signalling pricing power. 

Momentum stock selection needs to monitor market moves actively based on events, corporate announcements, and investor risk appetite guiding flows. By judiciously identifying rallies with fundamental legs, substantial compounding is achievable from earnings trajectory supporting further rerating. However, the chosen stocks need tracking on an ongoing basis to check for early signs of weakness, as volume declines over a few weeks, and to preempt sharp corrections by booking profits. The profit booking indicators may also include the ratio of advances to declines for the overall markets showing weakness or time-based targets given extreme moves mostly calm off after some months.

Advantages and Disadvantages of Momentum Investing  

Aspect	Advantage	Disadvantage
Letting Winners Run	Captures high-velocity moves through rapidly rising quality stocks	Joining late could prove risky, as momentum could deteriorate quickly.
Surfing Market Trends	Aligns investing strategy with ongoing bullishness	The strength in stock prices overall may align with strength in the stock indices
Strong Exit Discipline	Strict profit booking norms prevent giving back earned gains	Strict exits could potentially be early, with investors missing out on the last run

Rupee Cost Averaging

Rupee cost averaging eases investing through volatility by standardising allocation amounts at regular intervals. Investing fixed amounts regardless of fluctuating asset prices over various instalments makes average costs per unit attractive, benefiting long-run returns.

How Does Rupee Cost Averaging Work?  

Equity markets seldom display a linear trajectory, and sharp ups/downs are common. However, historical data shows that over longer durations, positive returns have outweighed interim declines that generate healthy compounding. Rupee cost averaging aims to smooth the impact of timing entry/exit by sticking to scheduled periodic investments deducted from income consistently. 

By investing some amount every month or quarter, irrespective of market levels, more units get purchased when prices dip compared to when they are elevated. This disciplined approach ensures investing continues undeterred even during weak sentiment phases instead of hesitating or postponing investments, fearing further drops. As and when the cycle turns rewarding, the additional units bought during lower points start contributing higher returns. Over long horizons spanning a few years, entering at regular intervals strikes an optimal average per unit acquisition cost better than timing concentrated purchases over a few months. This offers the twin benefits of setting aside annual savings goals for equities in a phased manner and averaging rupee cost into better returns.

For equity markets, historical data favours regular investments to navigate the volatility over engaging in market timing. Tools like SIP or STP allow the automatic routing of predetermined amounts into chosen mutual funds seamlessly every month, offering dual advantages of financial planning and rupee cost averaging. By opting for them, equity investing becomes simplified for individual investors through rupee cost averaging.

Advantages and Disadvantages of Rupee Cost Averaging

Aspect	Advantage	Disadvantage
Forced Discipline	Fixed investment enforces long-run savings habit	Opportunity cost due to slow deployment of capital.
Averaging Benefit	More units at lower costs, attractive per unit economics	No customisations to accommodate to market conditions.
Removes Timing Risk	Attractive entry points regardless of volatility	Lower potential returns compared to lump sum investment

Socially Responsible Investing  

Socially responsible investing aims to align investments with an investor’s ethics, ideologies, moral values, and financial gains. It promotes directing capital towards sustainable, responsible businesses, creating positive social change alongside pursuing shareholder returns.

How Does Socially Responsible Investing Work?

The spectrum of principles considered varies widely but usually covers:

• Environmental Practices: Use clean technology, renewable energy, efficient waste management, water conservation, etc.
• Philanthropy and Community Values: Supporting healthcare, education, employment generation, financial inclusion, etc., through donations, volunteering initiatives or welfare foundations.  
• Ethical Conduct: Board diversity, fair wages, workplace culture, human rights protection, supply chain monitoring, etc for equitable growth.
• Corporate Governance: Robust controls and transparency standards, visionary leadership, and director independence.

Some standard negative exclusions prohibit investing in businesses deemed detrimental, like tobacco, alcohol, gambling, weapons or fossil fuels. ESG, i.e., Environmental, Social and Governance metrics, are widely used to filter and identify companies that score well on material sustainable parameters.

Investment options include individual company stocks, thematic ESG funds, and customised mandate-based offerings from asset managers or robo-advisors that provide filtered sustainable baskets. Certain indexes also allow passive investments into socially conscious companies. Investors can choose based on personal values- gender lens, clean energy or institution building.

Socially responsible investing funds employ positive ESG screening or negative exclusion frameworks during stock selection. The former focuses on best-scoring companies, while the latter avoids harmful sectors. Investors should understand the underlying sustainability/ESG philosophy and metrics relied on by their chosen investment vehicles for comfort.

Advantages and Disadvantages of Socially Responsible Investing

Aspect	Advantage	Disadvantage
Aligning Finances with Values	Directs capital towards responsible businesses, addressing social and environmental issues	Limited investment options are available due to strong metrics to look for
Feel-Good Factor	Promotes purpose-driven investing, supporting causes prioritised by the investor	The stock prices of such companies may lag behind the benchmark
Risk Mitigation	Responsible companies may have lower regulatory, reputational, and disruption risks, leading to better quality earnings	However, there is the scope of subjective interpretation of some norms as well
		Varying definitions of "responsible" can make standardising each ESG metric challenging

Buy and Hold

Buy-and-hold investing relies on staying invested for long timeframes to harness the power of compounding instead of timing entries or exits reacting to market movements. The premise rests on historical data evidencing equity markets’ upward bias over multi-year periods despite interim volatility.

How Does Buy and Hold Strategy Work?

Trying to accurately predict market tops and bottoms consistently proves futile, even for seasoned investors and timers. Long-term portfolio value builds steadily by staying invested without panic reactions to negative newsflow, volatility or temporary macro weaknesses. Instead of daily market gyrations, the hold strategy focuses solely on an investment’s prospects to realise compounding.

The critical enablers for a compelling buy-and-hold strategy are:

• Careful Stock Selection: Fundamental due diligence aligning quality and growth prospects with investor time horizon and risk appetite.
• Cultivating Patience: Staying invested through market corrections and volatility by ignoring noise and relying on intrinsic value.
• Balanced Portfolio Construction: Blend of assets, including equities, debt, etc, instead of overt equity reliance such that intermittent withdrawals during weak markets can be avoided.

Market timing requires two decisions to be accurately correct – both exiting before decline and re-entering after correction. Being wrong on either count entails opportunity losses. By remaining invested, timing complexities get eliminated, allowing the power of compounding to work its magic through ups and downs over the years ahead.

Advantages and Disadvantages of Buy and Hold Investing

Aspect	Advantage	Disadvantage
Timing Risk	Eliminates risk of missing out on market gains by trying to time entries and exits	Inability to book profits or maintain liquidity
Full Potential	Captures full market upcycles by staying invested for the long term	High portfolio drawdowns meaning, very big swings in the returns due to market conditions
Compounding	Allows for the power of compounding to significantly grow portfolio value	Investors could feel emotional discomfort in ignoring volatility

How To Invest in Stocks and Track Them on Angel One?

• Open the Angel One app and search stocks from the search bar. Check the stock details under ‘Overview’.
• Once you have decided to buy a stock, click on ‘BUY’ below to go to the orderpad. Enter the quantity of the stock that you want to buy. 
• You can place the order on MTF, by using the ‘Pay Later’ option. You can also use advanced orders like GTT while investing.
• Click on ‘BUY’. And you will have placed the buy order.

Once bought, you can track the stock from the Positions section in ‘ORDERS’. Once the stock is delivered, you can track it from your ‘PORTFOLIO’. You can check the status of your overall portfolio from the ‘PORTFOLIO’ section itself. You can use ‘Portfolio Analyzer’ to better understand your Portfolio.

Conclusion

Equity investing offers multiple avenues to participate in economic development and wealth creation, such as value, growth, or dividend strategies. Each style carries specific characteristics, investment universe and risk-return considerations. Investors should carefully assess parameters like investment horizon, risk tolerance, liquidity needs and tax efficiency to decide on suitable options. 

Blending a few compatible styles in optimal ratios after factoring in market conditions can improve portfolio outcomes. Staying informed of evolving trends within chosen investing styles also holds relevance for the dynamic calibration of equity investments. 

Regardless of the selected approach, displaying temperance by avoiding extremes during euphoria or panic remains critical. Equipped with robust logic, appropriate strategies and measured responses, equity investing can aptly aid individual wealth-creation journeys.

With this, you are now equipped to start your investment journey.