One of the most important aspects of investing in mutual funds is the management of the portfolio of the stocks and bonds and any other asset class. The fund is managed either actively or passively by a fund manager. This has a considerable impact on the performance of the fund and your portfolio over time. It will be fair to say that the role of a fund manager is pivotal in either making or breaking your investment.
1. Role of a Fund Manager
As an investor, when you choose to invest in a mutual fund, it involves building a portfolio of securities. It is the fund managers who, based on research and analysis, make the decisions about buying and selling. Your portfolio can be managed actively or passively. If your portfolio is passively managed, it is based on an established index, and the components are chosen by keeping in mind the underlying index. In case of an actively managed portfolio, the fund manager picks the components of the portfolio. These fund managers play a decisive role in the performance of active mutual funds.
2. Duties of a Fund Manager
a. Meeting the reporting requirements
Mutual fund managers have to design funds keeping in mind the reporting standards as per the regulatory guidelines. The building of a fund takes into account the objectives of the investors, the strategies, risks, expenses and various policies. Fund managers are responsible for ensuring that the investors are aware and abide by these details and rules. It is also the responsibility of the fund manager to make sure that all the documents are furnished on time and following the laws and regulations.
b. Complying with Regulatory Authorities
The operations of the funds must happen in line with the rules set out by the governing bodies such as the Securities and Exchange Board of India, and other relevant authorities. These regulations cover all aspects, starting from signing clients to handling the redemptions. Fund managers are answerable to legislators and investors in case of non-compliance.
c. The Protection of Wealth
The fund managers have to protect the wealth of investors. It is given that funds are subject to some risks to generate returns, but they must not be subjected to reckless risk-assumption. The decision of the fund manager with regards to the buying or selling of assets will be based on the extensive research and due diligence. To protect the wealth of the investors, the manager will, if need be, employ investigations into the company in question, use risk management techniques to evaluate the investments, and so on. To address risk, fund managers have to ensure that there is adequate diversification in asset portfolios.
d. Monitor the growth and performance of the fund
The fund managers will take a call as to where to invest, and these decisions are governed by regulations, expectations and objectives of the investors. The fund managers are judged based on how well their funds perform and how they deliver growth that is above the interest rates and inflation rate. This justifies the risk they take for investing.
e. Oversight and Hiring
With the responsibility of managing funds being extensive, fund managers have to get assistance from various professionals and even firms in order to deliver. Specific duties like issuing annual reports, getting capital, negotiating with brokers, and so on, are outsourced. This way, the fund managers can transfer some of the regulation related responsibilities to a third party. But ultimately it is still the fund manager alone who is responsible for how the funds fare.
3. How to evaluate a Fund Manager?
Fund managers are critical for the selection and performance of your funds, and so you must consider certain things when evaluating a fund manager. Most experienced investors pay attention to the manager and their fund management team. One can differentiate between a good fund manager and an average one by looking at such factors as:
a. Has the fund manager succeeded in outperforming the benchmark in perpetuity?
b. Does the manager keep track of the other institutional investors’ (DII or FII) buying and selling of stocks?
c. Are they experienced?
d. Are they able to identify scripts way ahead of their peers?
4. How do fund managers decide where to invest?
Apart from the comprehensive knowledge on the subject and far-reaching insights, fund managers gather invaluable insights from their research team. Some other considerations include:
a. They check for the shifts in the stock market to analyse the volume of the shifts
b. An analysis of the competition in the industry plays an equally vital role to gauge the macroeconomic outlook
c. A thorough review of the annual results of the companies that the fund manager intends to invest in
d. Finally, all the information mentioned above is weighed along with the experience of the top managers and directors before making investing decisions
Investing in mutual funds is subject to market risk. Not having the insights to pick the right fund or fund manager can be a costly affair. ClearTax has simplified this for you by offering you funds that meet your investment objectives and goals. With us, you can be assured of your funds being managed by the best in the country.
Change of fund manager should not be the sole reason to switch or redeem from one fund or fund house to another. The expense ratio of a fund and composition of the portfolio a fund holds are other significant factors that may impact your returns.
All the above information is provided in the Scheme Information Document (SID) and Key Information Memorandum (KIM) provided by fund houses, which undergo relevant revisions from time to time.
If there is any change in the portfolio, an investor has to read and understand before investing, which is available in the SID and KIM.
At last, a mutual fund is a tool for wealth creation and should not be judged in the short run as it usually reaps benefit only in the long term.
“So keep investing!”