High Beta Mutual Funds: Is it a Good Investment Strategy?

You may not aware of this Investment strategy. So i thought that I should explain about this investment strategy to you. But before that first of all let us understand briefly that What it means by Beta and how they work?

Beta is a measure of a stock's volatility in relation to the market as a whole.

The Beta of the Index is considered as 1. Thus, the Beta of Sensex, Nifty, DowJones, Nikkie & Heng Seng is 1. Now, suppose the Beta of some Stock is 1.2 than it means that the stock is +20% more volatile than the underlying index.

So it means that if the underlying index will give 10% return at the end of the month, This stock having Beta of 1.2 will give you 20% more return than the Index means 30% in our example. However, during the down market, the same stock will loose 20% more value than the others. It means that if the market will give –10% return, this stock will give –30% return.

Now, suppose if the Beta of some stock is 0.80 than it will give you 20% less return than the Index in the up market and it will loose 20% less in its price during the down market thus stabilizes your portfolio.

Now, The Beta of Index Mutual funds is 1. Because they have the portfolio that is the mirror image of the underlying index. Now, suppose what is you chose a mutual fund having high beta? I mean beta of more than 1?

Say for example, one Investor invest his capital in a mutual fund having beta of 1.1. Thus during the Bull market, this fund will outperform by 10% than the underlying index. Some Investors invest in high beta mutual funds during the up market to boost their returns while in the low beta mutual funds during the down market to stabilize their portfolios.

However, This is not the recommended strategy because nobody can predict the next market movement with precise accuracy. i just wanted to tell you that how sophisticated investors think and that’s why I posted this article here…!!!