Combination of Bottom-up and Top-down Approaches


The top-down approach starts with the general conditions

It's good to maintain a balanced approach while making any investment decision.

Mutual fund managers are entrusted with investing investors’ hard-earned money in the best available stocks, securities, and other assets in mutual funds. There are two most common approaches, top-down and bottom-up methods. The top-down approach starts with the general conditions and moves to the specific, while the bottom-up approach moves from the particular to the general. However, the mutual fund managers apply a judicious combined top-down and bottom-up approach to maximize the fund. Therefore, this article will broadly discuss when both approaches are combined to form a counter-current process.

Top-down vs. Bottom-up

Before investing funds, the top-down approach aims to decide based on the macroeconomic factors affecting market development to maximize portfolio. For example, interest rates represent a critical economic indicator that impacts many areas such as the stock market and others like bonds and commodities. Lower interest rates can stimulate bank stocks and those investing in real estate. Conversely, rising rates often indicate higher unemployment and slower economic growth.

On the other hand, bottom-up planning aims to take mutual fund investment decisions based on microeconomic factors. Bottom-up planning studies fundamental qualities of a company, fund, stock, and other investment based on products and services offered, demand and supply statistics, financial statements, and additional information, giving a picture of overall financial health.

Who prefers the Top-down approach?

Investors in a mutual fund, who have a strong interest in economics, politics, and global conditions, prefer a conservative, low-risk approach and have limited investment experience pick a top-down approach in their investment strategy.

Who prefers the Bottom-Up approach?

Mutual fund investors who are experienced and comfortable with short-term investments and have a certain degree of risk tolerance prefer a bottom-up approach. As a result, they have little interest in studying the economy or market trends.

What is a Combination of Bottom-up and Top-down plans?

While investing in mutual funds, when an investor applies top-down and bottom-up approaches simultaneously, it is called Top-down and Bottom-up planning or counter-current planning. It is bidirectional planning linking both top-down and bottom-up approaches. Here planning takes place both from top to bottom and bottom to top. With this approach, the bottom-up plan meets the top-down target. Both the methods are often combined as and when required to make optimum use of both approaches.

Why is this combining procedure required?

There are different investments styles, and it’s better not to invest in a manner that’s entirely top-down or bottom-up focused because:

  • The Bottom-up & Top-down strategies and activities have their own advantages and disadvantages. Even if investors apply top-down approach analysis, they still want to look at the fundamentals before investing in a stock or other investment as markets do not always behave predictably. At the same time, investors with a bottom-up approach should consider broad economic indicators also as it becomes risky to overlook macroeconomic factors that can impact a company or stock.
  • It’s good to maintain a balanced approach while making any investment decision. So the goals set are more feasible to achieve due to this combined process.
  • Combining both strategies enables the investors to choose the right funds at the right time. In addition, it builds a diversified portfolio and helps to achieve desired results.
  • Decision-making in investment becomes easy. There is better financial control as the top-down view provides guidelines for proper allocation to specific areas and greater financial accountability by getting involved individually through bottom-down and making the best decisions on spending the money.
  • Most investment experts recommend a proper mix of approaches. The combination successfully uses the relative merits of the two complementary approaches and significantly improves the functionality.

 

No single approach is right for investment, and it applies to all investors. For example, a mutual fund that pools assets from multiple investors or an investor in a mutual fund applies this combination approach to minimize risk while diversifying a portfolio. However, if you want to identify the most suitable investment opportunities for your portfolio, be whatever your preferred style of investing is, always get expert advice.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh