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Fund house or Fund manager – Which one?

The mutual fund (MF) sector has come a long way. In 1987, the doors were first thrown open for entry of the first non-UTI mutual fund. During those early days, only the public sector was allowed to operate MFs.

Then, in 1993 (a watershed year for MFs), private sector mutual funds made their appearance. Kothari Pioneer (now merged with Franklin Templeton) was the first in India. In a relatively short span, the assets under MF management have grown phenomenally to around `7.5 lakh crore. But it is still only the tip of the iceberg; the bulk of Indian savings are parked in bank deposits. But, over time, as investors gradually discover it is indeed the instrument of an MF that is the ideal vehicle to build one's capital over a period of time, the figure will increase manifold.

That said, it is strange that one needs qualifications to distribute (sell) funds, there are none needed to manage these! One would think that if distributing funds is a responsible task, managing the distributed funds would be more so. Currently, anyone can be a fund manager regardless of their qualifications.

Basically, the issue thrown up is, how important is the role of the fund manager in the overall scheme? Are qualifications and credentials of an individual more critical or are the systems, processes and risk management strategies put into place by the MF that employs him? Does the fund manager's investment style take precedence over the fund's investment process or is it the other way around?

MANAGER VERSUS HOUSE

There is no plain yes or no answer and it depends upon the fund and its philosophy. When you invest, you are implicitly reposing a certain amount of trust into the fund manager's expertise and capability. You are essentially hiring a professional to manage your money and pick your stocks and because of the cost sharing with thousands of others, the professional expertise comes at an economical price.

Conventional logic would say it is the ability and the skill of this professional, the fund manager, that should generate the returns. However, is it always so? Investing thousands of crores belonging to hundreds of thousands of investors is clearly not a one-man job. What's more, now even the international markets are being opened for domestic mutual funds.

Typically, MFs are usually managed by a team of managers, backed up by analysts and researchers. Just like a captain is as good as his team, without able support, no matter how skilled a fund manager is, he will not be able to deliver optimally.

Second, it also depends upon the type of fund under management. A passive fund, such as an index fund that mirrors a certain benchmark, does not require the active intervention of a fund manager. Similarly, a quant or an arbitrage scheme, where the mandate of the fund is mechanical and pre-defined and not dependent upon individual calls, requires more of software, systems and IT support, rather than fund management expertise.

The other factor one has to consider is the management philosophy of the fund house -- whether process-driven or one that provides fund managers latitude and flexibility. Some houses give a fair amount of autonomy to the fund manager in taking large sectoral calls, churning the portfolio or even investing in small caps or unlisted companies, subject of course to Sebi regulations. On the other hand, there are fund houses that follow a strong, process-driven investment style and the fund manager's role is to perform within the parameters defined by the institution.
 

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