Will your investments give max returns - ET

Underlying fundamentals do matter when it comes to explaining rising or plummeting stock prices. And a shrewd investor studies the fundamentals and driving forces before pumping his money into the market. A speculator, on the contrary, does not make his decision to buy or sell on the basis of factual company data. Instead, he tries to book profits in bullish markets based on conjectures, well aware of the possibility of his entire capital being washed away. Let's delve into popular investment strategies that will, to a certain degree, protect your money against complete erosion even in adverse market conditions.

Value strategy

The main idea behind value investing is to identify stocks that are currently not treated well by the market and are trading at numbers less than their actual worth. This strategy assumes that market pundits take time to realise the intrinsic worth of some companies but will do so in due course of time. A value investor puts his money in such undervalued stocks after a detailed study of the company's underlying fundamentals.

Why are some stocks undervalued? The company could be into manufacturing of products that are not exciting or alluring enough, yet are indispensable. Value investors believe that stocks of such companies would get their due attention in near future. Speculators believe that stocks trading at low prices are a bad choice. But a value investor can differentiate between the low priced stock of a company that is going bankrupt and the low priced stock of a company whose management and business strategy has undergone a complete revision.

The biggest challenge to value investing is spotting stocks that are undervalued. Value investors do a thorough study to find out if the company is not debt-ridden and has steady cash flow. Other valuation measures to detect undervalued stocks include low price-earning ratio, low price-sales ratio, rich dividends and low price-book value. It is important to note that volatility is quite low here with ample shock cushion in bear markets. Longer holding period in this strategy amounts to large income in dividends.

Growth strategy

Growth investment is a long-term strategy. The growth strategy attempts to find shares of companies that are growing and will continue to grow rapidly. Rightly estimating future growth potential of a company will yield you superior results. However, keep in mind that past growth is not always indicative of future growth potential. Further, most future growth estimates tend to be overstated and hence this strategy needs adequate caution.

It is always better to have an error or safety margin for all your estimates. While the more cautious investors bet on large cap companies, typically growth investors go in for small or mid-cap companies that have more room to grow. Price earnings and growth or the PEG value is a superior measure for screening stocks. PEG value less than one is considered a good pick.

Momentum

Momentum investing is a short-term holding strategy that works well in bull runs. Momentum investors seek to double or triple their money in a matter of few months. While they do not often go in for thorough stock analysis, they base their picks on stocks with rapid earnings growth, positive earnings growth, forecast and solid price chart.

Momentum investors prefer stocks that are trading high volumes and at high rates. Such stocks are the ones that are favoured by the market today. With high volatility and short holding periods, investors must be aware of tax implications on profits booked. Earnings per share rank measure a company's EPS growth relative to the entire market.