Mutual Fund Investing with Style

When deciding to invest in a mutual fund (or any other investment), it is generally accepted that a diversified portfolio reduces risk over the long term. The readers would have also come across findings and assertions along the lines that stocks do better than bonds over the long term, small cap stocks can be more rewarding than large cap stocks, junk bonds are riskier than treasuries, etc. What do all these terms mean? In this article, we will review the concept of a mutual fund style that can help visually illustrate these concepts and aid in developing a diversification strategy.

There are two basic style that we need to understand. One is for the stocks and the other is for the bonds. The key attributes that a stock stylebox reflects is the size of the stocks (in the fund) and the valuation of the stocks (in the fund). The bond (or fixed income) stylebox on the other hand reflects the credit quality of the bond and the duration of the bond (maturity).