A manager may be the difference between the best and worst funds. Here's how you can find the right one
Does a mutual fund manager make a difference to your investment? The answer may not be as easy as you think, since most best-performing mutual funds have moved away from individualistic fund management to process-driven methods, limiting the scope of an individual's role in investment decisions. In fact, many fund managers would speak at length about how the "system" their fund house has in place makes their task of picking stocks easy even though it restricts their freedom. Still, the question is important, especially after recent reports that the Securities and Exchange Board of India (Sebi) may ask fund managers to disclose to investors their track record of managing money.
Let us take a look at the universe of large-cap funds over the past five years. According to Value Research, an independent mutual fund tracking firm, the topper in the category is DSP Blackrock Top 100 Fund, with an annualised return of 17.63%, while LIC Nomura MF Opportunities is at the bottom, with a return of 5.65%. The BSE Sensex, the bellwether of the stock market, has returned 11.25% in the same period.
This shows that there is a difference of 12% in returns between the best and the worst funds in a single category and that there are funds which fail to beat even the broad market benchmark. Surely, the fund manager of the first fund must have done something extra to beat the returns of the Sensex and also peers.
According to experts, there are two things that could produce extra returns. One is the investment philosophy set by the chief investment officer in an AMC and the other is the "calls" that the individual fund manager makes.
It is the fund manager who, over a period of time, generates that extra alpha over the benchmark through proper stock selection and risk management.
Role Of The Fund House
Broadly, there are two types of fund houses: one is process-driven and the other gives autonomy and freedom to the fund managers. Those falling in the first category follow a strong, process-driven investment style and the fund manager's role is to function within the parameters defined by the fund house. Those in the second category give flexibility to the fund managers in taking major investment decisions, like investing in small-caps and unlisted companies, churning the entire portfolio, and taking huge sectoral positions. Both methods have their merits and demerits. Funds whose returns depend on the calls of the fund manager may underperform in case of a change in the fund manager, while those that follow a strict process and backups could be better equipped to handle such changes.
In short, the fund manager can make a difference if he is given a good platform to perform by the fund house. Each fund house represents a certain investment philosophy, history and expertise, and these factors do impact the way a manager handles a scheme. That is why financial planners insist that it is important to get the fund house right. There are as many as 43 different asset management companies (AMCs) in India. So how does one distinguish one from the other?
We choose a fund house based on the pedigree, fund managers' experience, the size it has, past performance, the expertise it can bring in and the frequency of communication.
Managing a corpus running into thousands of crores of rupees requires a good team and cannot remain a one-man show. The kind of support that the fund house gives in terms of processes, risk management systems and infrastructure helps attract good fund managers. There are fund houses, like HDFC and Franklin Templeton, which have managed to retain talent over long periods of time. This has helped their schemes perform consistently over a long period of time. "We give fund managers complete independence within boundaries, which helps attract good talent.
Now, the crucial question is: how do you assess whether the good talent pool, including your fund manager, would make a difference to your investments?
The Person Behind The Fund
Do a background check of the person who is primarily responsible for managing your scheme. The manager may have been an analyst earlier or a fund manager at some other organisation, so check his track record there.
His work experience will give you some idea about him. If he has been an analyst at the same fund house, he will understand and implement the philosophy of the fund house better. Check the performance of his funds to get a better picture of his capabilities. Sure, past performance is no guarantee for future returns, still it definitely gives a good indication about his expertise. For an investor looking for returns, it is the judgement of the fund managers that they should rely on. The only metric that they have to go by in this regard is the track record of the fund managers.
The Management Style
The investment strategy and process of the fund manager should be easy and simple to understand. It would be great if the fund manager and you have the same objectives. So if you are conservative and are looking for stable returns without a lot of volatility, it may make sense to go with a fund manager who follows the value investing approach. If you are a growth investor and want aggressive returns, you could choose a fund manager who takes extra risk for returns. However, you need to understand that in this case the fund may be a lot more volatile, with both returns and losses generally on the higher side.
Awards
Awards are given by media houses and professional mutual fund tracking companies. If a fund manager consistently wins awards, it indicates that his performance is amongst the best of the lot. If your fund manager scores high on these counts, chances are that he may make a difference, however small, to your returns.
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Also, know how to buy mutual funds online:
Invest in DSP BlackRock Mutual Funds Online
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Invest in Sundaram Mutual Funds Online
Invest in Birla Sunlife Mutual Funds Online
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Invest in SBI Mutual Funds Online
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Invest in IDFC Mutual Funds Online
