What is The Top Down Investment Approach in Mutual Funds?

We’ve heard this plenty of times in stock market circles. A stock market investor or broker gauges that a certain industry, like the automobile industry for example, is performing well and decides to invest in a particular stock of the industry. This is the top-down approach in a nutshell. When an investor first looks at an overall macro picture of the economy, and based on their findings they decide to narrow down on a particular stock, it is termed as a top-down approach to investing.A top down approach investing requires you to first find out what economy or sector is doing well, instead of starting with a particular stock itself.

If you want to apply the top down approach to investing, you’ll first have to look at a particular economy that you feel is doing great, then you need to find a particular sector within that economy that is performing well. And then, finally, you can zero in on the actual stock that you want to invest in. The name of this approach exactly suggests what it is, since it takes a bird’s eye view or a ‘top-down’ view of the market first, and then goes on from there.For eg: In your research of various economies you find that the Indian economy is doing pretty well. Within the Indian economy, you see that the pharmaceutical industry is particularly outperforming. Next, you find out which stocks in the pharmaceutical sector are really performing well and decide to invest in those stocks. With these steps, you have actually taken a top-down approach to stock market investing.

At one end if you have the top down approach, at the other end you have the bottom up approach which requires finding the particular stocks first and gauge whether the company has the potential to grow and then invest in them.This is a more difficult approach since you will need to heavily research the stocks you’re interested in. For this reason, the top-down approach is much more attractive, especially for new and inexperienced investors. So our advice would be to go for a top down approach, if you’re just entering the world of stock market investment.

It can be difficult to choose the approach that suits you best. But like we said before, the top down approach is more appealing since it requires lesser analysis and research as compared to a bottom up approach. Both have their own advantages and disadvantages. The best case scenario would be to try both approaches, if you can, and decide which one you prefer.Additionally, so much also depends on the experience and knowledge of the investor. A seasoned investor has enough experience to gauge a stock and apply a bottom up approach. In the end, it all depends on your own experience and suitability.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.