The Role of a Fund Manager in Mutual Funds
Investing today can be confusing to many investors due to the presence of plethora of schemes and investment options. Mutual fund is one of the categories which offer many advantages like easy accessibility to financial markets, diversification of portfolios and minimum risks. Talking about mutual funds, a fund manager’s role cannot be ignored. A fund manager has been entrusted with the responsibility to manage and protect investors’ hard-earned money. Let us learn more about a fund manager.
Who is a fund manager?
A fund manager is a professional who studies the financial markets, economic trends, domestic as well as international policies, stock markets etc. in order to beat the performance of benchmarks and earn higher returns on investments. A fund manager is a crucial and experienced person and is generally the face of a mutual fund house. Asset Management Companies (AMCs) rely on the knowledge and experience of fund managers. Fund managers are highly educated and experienced professionals who hold the wisdom of being research analysts. After the experience of many years in market analysis, they get to manage the schemes on their own. Besides experience, an extraordinary background in education has been observed as common characteristics amongst fund managers.
What is the role of a fund manager?
A fund manager plays a crucial role in managing portfolios by diversifying the assets into different categories and minimizing risks. Let us have a look at the functions of a fund manager explained below:
(1) Monitoring the growth and performance of the fund
The major role of a fund manager is to generate alpha on the investments. Each fund house has different investment strategies and fund manager is responsible for executing the investment strategies in a systematic manner. Investment portfolios can be managed by either a single fund manager or a team of two and more.
(2) Carrying out research
Research is the key to any type of investing. Fund managers delve deeper to understand the stocks by carrying out a rigorous research as they want to increase the return on investments. Large fund houses may have a team of fund managers who are managing the funds by analyzing the markets and future trends.
(3) Executing fund’s strategies
Mutual funds follow two types of strategies i.e. active and passive strategy. Actively managed portfolios require an agile attitude from a fund manager who keeps on studying and analyzing the market trends on a regular basis. Active fund managers try to stay ahead of the curve by anticipating future trends in advance. On the contrary, passive fund managers adopt index investing where their investment returns will be replicating some indexes.
(4) Assessing risk
Before putting money into different assets classes, fund manager tries to assess the riskiness of a portfolio and evaluates the decision whether to invest in some asset class or not. All decisions related to investing are taken with utmost precautions as people have trusted the fund manager to manage their portfolios. As a retail investor, you can get all the information about the bigger companies on their respective websites but then there are Small and Mid-Cap companies whose information are not readily available. It is here a fund manager’s expertise plays a major role. The fund manager schedules meetings with top management to evaluate the future strategies of Small and Mid-Cap companies.
(5) Compliance
Fund manager should manage the investment portfolio as per the rules drafted by the governing body Securities and Exchange Board of India (SEBI). These regulations set a standard for ethical and fair investing by prioritizing investors’ interest. Fund managers also must make periodic reports related to the performance of managed portfolios and comply with the new rules as and when they come from SEBI.
(6) Delegate
Sometimes fund managers must rely on third party for professional help to deliver what has been promised to investors. Tasks such as making yearly reports, accumulating capital, dealing with brokers, etc. are given to third parties. By delegating this, the fund manager can devote more time to researching and analyzing the market.
How do the fund managers pick the stocks?
Mutual fund managers use different techniques to ensure that the money entrusted to them by the investors grow well. They are two popular investment methods adopted by the mutual fund managers which are explained below:
a) Top down approach: Under this approach, mutual fund managers start by studying the domestic and macro-economic scenario before committing their funds. Top down fund managers also look at various factors which might have an impact on the economy like political scenario, government policies and general global trends. After concluding this macro level analysis, the fund manager then concentrates on analyzing the different sectors within the economy and hand picks those sectors which are likely to perform well under the prevailing economic conditions. The fund manager then picks up few companies in each sector and analyses the fundamentals and merits and relative valuations of each company individually.
b) Bottom up approach: Under this approach, the fund manager starts with the company, then moves up to the industry prospects and ultimately to the economic forecasts. In this method, the fund manager focusses more on the fundamentals the companies, their ability to cope under mixed economic conditions and the potential to build upon their growth prospects. Upon selecting the company, the fund manager will perform a scenario analysis to determine how the company will fare under various economic conditions like interest rate change, change in tax laws, change in price of raw materials, competition, etc., Then the fund manager zeroes in on a particular company which looks to have good potential irrespective of the sector it belongs.
What is the criterion to select a fund manager?
There are no set rules to determine the quality of a fund manager but knowing your fund manager can pay you in future. It is a good practice to analyze churn rate of the fund manager. Churn rate is defined as the number of stocks sold to purchase new stocks in the tenure of a fund manager. Actively managed mutual funds usually have a high churn rate. For example: Edelweiss Large Cap Fund has 356 percent churn rate. Second most important factor while selecting a fund manager is to track the past records of a fund manager. Last but not least is the fund manager’s commitment to stick to his strategy and not get overwhelmed by the upward or downward movements of the market. He should not follow some stocks blindly with lofty expectations and must have a mind which is able to think independently.
What should be done when a fund manager exits?
Sometimes quitting of a fund manager can shake investors’ confidence and they can get panicky. Although the importance of a fund manager cannot be undervalued but starting redemption of assets in the event of fund manager’s exit is not a wise step. The fund manager represents a mutual fund house and he/she is executing the strategies as per the rules of a fund house. If your portfolio’s return keeps deteriorating for longer period after a fund manager quits then you should reanalyze your portfolio. There might have been events when a fund manager’s exit has led to a slowdown in the performance of a fund, but an addition of new fund manager could have led to improved performance of a fund. Investors are advised not to get panicky by short term fluctuations after the exit of a fund manager. It is important to understand that fluctuations are unavoidable and the fund houses which manage them well will be ahead of the curve in the longer run.
Bottom line
A fund manager plays a crucial role in implementing the fund strategy. He gives his best in ensuring both the protection and growth of wealth. Having a qualified and experienced fund manager by your side can make investing easy for you. They bring alpha to your investments by being hands-on in their research and financial agility. A fund manager always knows how to adjust in times of turbulence by maintaining consistency in returns. Investors, therefore, should carefully choose their fund managers as this decision will have a long-term impact on your financial growth.
Happy investing!
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