You have planned to start investing in mutual funds to grow your wealth. You have done some research and learned the basics, and now it is time to choose a mutual fund. But there is one more crucial decision to make – who will manage your investment? After all, the expertise of the mutual fund manager plays a big role in determining the success of your investment. This is where evaluating mutual fund managers comes into play. But how exactly do you assess their skills and suitability? Let’s understand.
Role of Fund Managers
A mutual fund manager is the person (or team) responsible for making the investment decisions for the fund. Their goal is to maximise returns for investors while managing risk. They research various assets, including stocks, bonds, and other securities, and make buy/sell decisions based on the fund’s objectives. A skilled fund manager will have the ability to navigate market ups and downs, make smart decisions, and ultimately help you achieve your financial goals. In some cases, managers also incorporate Derivative Trading to hedge against risk or enhance returns, depending on the fund’s strategy.
Factors to Consider When Evaluating Your Mutual Fund Manager
Here is the list of six key parameters that help you understand the skills of your preferred mutual fund scheme’s fund manager.
1. Assess Track Record
When evaluating mutual fund managers, their track record is crucial. Historical performance explains a manager’s ability to generate returns and handle market conditions, including bull and bear phases.
Not only that, you must also review a fund manager’s results against the scheme’s benchmark and similar funds. This whole thing reveals if the manager’s results reflect skill or are simply due to market conditions. For instance, performance during a bull market but not during downturns might hint at a lack of risk control. In contrast, consistent performance across all cycles likely indicates a sound strategy.
Moreover, evaluating the manager’s tenure with the fund and overall industry experience can provide additional insights into their expertise and reliability.
2. Assessing Investment Strategy and Style
Investment strategies are broadly classified into growth, value, income, and balanced approaches. Growth investing focuses on companies expected to grow faster than the market average. This approach can entail higher risk since it focuses on future growth rather than present-day metrics. On the other hand, value investing prefers stocks of companies priced below their intrinsic worth. While less risky, this method may call for patience as the market gradually realises the company’s true value.
Income investing is directed at securities that generate regular earnings, often through dividends or interest, and is usually preferred by those who need a stable income, such as retirees. Meanwhile, balanced investing integrates growth, value, and income styles to build a diversified portfolio.
When determining whether a fund manager’s approach aligns with your financial goals, ensure you factor in your risk tolerance, investment duration, and objectives.
3. Assessing Transparency and Communication
Regular communication from the fund manager is essential as it helps build trust and provides investors with a clear understanding of the fund’s performance and strategy. Here is what you need to check:
Review monthly fact sheet. This report provides a summary of your fund’s performance and holdings. It includes crucial data, such as asset allocation, top holdings, and sectoral weightage. Reviewing this monthly helps you assess whether the fund is aligned with your financial goals.
Check the dividend distribution report. This report provides details on dividend payments, including dates and amounts. Knowing the dividend schedule and payout can help you plan for cash flow or reinvestment decisions within your portfolio.
Assess risk analysis report. Mutual funds periodically release risk analysis reports to show the fund’s risk factors, such as volatility and sector-specific risks. By examining this report, you can gauge how much risk you are exposed to and decide if it suits your risk tolerance.
Check your mailbox or your stock trading app for investor communication updates. These updates are periodic notices of fund changes, such as shifts in fund managers, investment strategies, or expense ratios.
4. Assess Client Base and Asset Size
A fund manager with a large and diverse client base tends to have a more stable inflow of investments, allowing better portfolio management without the pressure of liquidity issues. For instance, if the client base is diverse and spreads across institutional and retail investors, the manager is less likely to experience drastic fund outflows in turbulent markets, which stabilises the fund’s net asset value (NAV) over time.
Similarly, asset size is crucial because managing a large fund pool can bring benefits and challenges. A larger asset size often provides access to high-quality research resources and more opportunities for strategic diversification. However, beyond a certain point, it can also make it challenging to make quick investment adjustments, especially in less liquid markets, which can hinder fund performance.
5. Review Ethics and Integrity
Ethics play a vital role in asset management. Fund managers have a fiduciary duty to act in the best interests of their clients. Integrity ensures the manager won’t engage in unethical practices that could harm investors.
Look for past ethical issues or controversies involving the fund manager. Check if they have a reputation for acting in the best interests of their clients and adhering to regulatory standards.
Assess Fees and Expenses
Every mutual fund displayed on your Demat App has expenses associated with management, and these fees can significantly impact returns over time. High management fees may reduce net returns.
Ensure the fund manager’s fees are reasonable and compare them with those of similar funds. Many actively managed funds have higher fees due to the resources required, but some managers may charge excessive fees without delivering superior performance. Low-cost options can sometimes be equally effective, so weigh the costs against potential returns.
Conclusion
Selecting a mutual fund manager is much like picking an advisor for a long journey – you want someone knowledgeable, reliable, and aligned with your goals. By examining their track record, strategy, fees, and ethics, among other factors, you are well-equipped to find a manager who can guide your investments effectively. Now that you know how to select a fund manager, the next step is to open Demat Account to start your investment journey with a few clicks.
