Proper understanding of a fund is important as it enables investors to keep a tab on its actual performance
THERE are various types of mutual funds and one way of segregating them is on the basis of active or passive management. Th is makes the understanding of the nature of the fund easy for a lot of investors, as it shows the basis on which investment decisions will be made.
Some funds also have a mixture of both active and passive management. Su ch funds need to be considered carefully if they are to be selected as an investment avenue. Here is a look at the manner in which such funds operate and its impact on decision-making.
Mixture: The selection of the portfolio of an equity oriented mutual fund can be done in an active manner. The fund manager can take the decision about which stocks should be bought and sold by the fund. On the other hand, there can be a passive fund where the decision making is not in the hands of the fund manager as a specific index is followed for the purpose of construction of the portfolio.
Others also adopt a mixture of these two routes.
This means that the actual selection of the stocks might be undertaken in an active manner by the fund manager. However, here the extent of the holdings in equity or debt is governed by other factors over which the fund manager has no control. This ensures that the fund manager does not get carried away by the situation and there will be a rebalancing of the portfolio among various asset classes at different time intervals.
Balancing: In this kind of investment, a specific balancing takes place in the portfolio on a regular ba sis. This happens when the equity markets either run up or come down. The index selected is usually the leading index like the Sensex or the Nifty.
If this goes above a certain level on the price earnings front that is predetermined (based on the situation historically), then the scheme will have to move a part of the corpus into debt.
If this rises further, an additional amount is moved into debt and so on.
The reverse is also true whereby money will be moved from debt to equities when the valuation has come down either due to a rise in earnings of companies or a fall in value.
This ensures that the individual investor does not have to undertake a balancing of the amount of their investment.
Historical: The investor also needs to understand that the entire situation is based on historical positions, so this becomes the basis for the selection of the figures for the investments.
The current situation in the equity markets might be different and this could result in the historical trend not being followed for some time.
This could be a factor that can affect the investor, but the actual situation might be known only in hindsight. The manner in which this will be evident is through the route of underperformance of the scheme. This happens, for example, when a fund moves away some part of the corpus to debt when the markets are rising. This action might show some underperformance if the rise in the markets continues for some more time.
Objective: There has to be a specific objective when such a fund is selected for the purpose of investment. The investor might not want to decide about moving money from debt to equity based on their own decisions and would want their fund to do so.
Funds that display this kind of structure are few in number and are not classified under a separate structure, as they are equity-diversified funds.
Being able to understand this kind of fund properly in terms of its nature is important, as it will enable investors to see the actual performance in the right perspective.
