A mutual fund is an investment vehicle that collects money from multiple investors with a common investment objective. It invests in various securities such as equities, bonds, etc. All this work is done by a fund manager and his/her/their team.
The role of fund managers in mutual funds is crucial. They are responsible for making all the key decisions regarding buying and selling securities, market research, and more. Thus, it is as important to know about a fund’s manager’s expertise as it is to know about the mutual fund’s performance and risk levels.
Who Are Fund Managers?
Before diving into a fund manager’s role in mutual funds, it is important to understand what he does.
In short, a fund manager is an individual who manages a mutual fund’s portfolio and is responsible for its performance in the short and long term. In addition, they design their investment strategies to achieve a mutual fund’s investment goals.
Fund managers are highly experienced professionals in analysing the financial markets. In addition, they hold knowledge about and are up to date with the latest economic trends, financial markets, foreign and domestic government policies, etc.
AMCs (Asset Management Companies) rely on fund managers’ knowledge and experience in mutual funds. A mutual fund can be effectively managed by an individual or a group of fund managers, depending on the complexity of the fund.
What Is the Role of a Fund Manager in Mutual Funds?
Fund managers make all the key decisions regarding a fund they are responsible for based on market research and analysis. Their role depends on whether the fund is actively or passively managed.
A fund manager’s role is critical in the case of actively managed funds since the objective is to outperform the market. In this case, he or she is solely responsible for choosing the components of the fund’s portfolio. Therefore, his/her decisions play a crucial role in the fund’s performance.
However, in the case of passively managed funds, the components are chosen based on an underlying index. The requirement is to match the returns of the index with minimum errors.
A few of the key responsibilities of fund managers are discussed below:
- Creation and protection of wealth: One of the fundamental duties of fund managers is to grow and safeguard the investors’ capital. After extensive market analysis, they use various tools and techniques to meet this requirement. They also employ multiple risk management techniques, such as portfolio diversification, to reduce the risk in such a way that it does not affect the expected returns.
- Monitoring the funds’ performance and growth: After selecting the components of a fund, it is necessary for the fund manager to monitor its assets constantly. This is important to meet the investment objectives. This, in turn, helps them make further decisions regarding the fund.
- Complying with regulatory authorities: Mutual Funds are regulated by the SEBI (Securities and Exchange Board of India). The rules and regulations made by SEBI are set for ethical investing and prioritising the interests of investors.
A major role of fund managers in mutual funds is to ensure their funds comply with the rules set out by SEBI. They are required to make frequent reports regarding the performance of their funds and are answerable to authorities and investors in case of non-compliance.
- Delegation of duties to third parties: Managing a mutual fund is a huge responsibility and comes with various tasks. Some of them are issuing annual reports, dealing with brokers, and accumulating capital. Fund managers delegate such functions to third parties such as multiple professionals or other firms.
This helps them focus more on market analysis and research. However, ensuring that the outsourced tasks are done properly is the fund manager’s responsibility.
How to Assess a Fund Manager?
Investors must evaluate the skills and past records of fund managers before investing since the funds’ performance relies highly on their competence. There are various factors that investors can monitor to assess and get insights about a fund manager. Some of them are:
- Fund manager’s track record: A good judging factor for a fund manager is the past performance of the funds they manage. Consistent returns over the years indicate experience. Though a fund’s past performance remains an important factor, one should not invest solely based on it.
- Investment style: Every fund manager has a different style of investment. For instance, a fund manager may invest for long-term goals while another one may invest for short-term benefits. Investors can analyse the investment styles of fund managers by taking a look at changes in their portfolios. This is crucial for an investor to understand if their goals align with those of the fund managers.
- Performance of fund against its benchmark: Every mutual fund comes with a benchmark index which it aims to outperform. Many fund managers succeed in this when markets are rising. However, it is vital to look into his or her performance during market downturns. This helps differentiate between the skilled ones and the ones who were lucky.
- Investment of fund managers in their fund: When fund managers invest their own money in the fund they manage, this is a positive sign for investors. It indicates that their capabilities are good enough for them to use for their own benefit.
How Do Fund Managers Choose Investment Components?
With their skills, fund managers analyse metrics such as profitability ratio, liquidity ratio, revenue growth, cost indicators, etc., to make a list of suitable companies for investment. Using this analysis, all underlying company-related information, as well as the recent trends in the economy such as the upcoming monetary policies, market movements and others, are featured.
In this way, the fund manager shortlists the securities he or she wants to add to the fund’s portfolio.
What Should Investors Do When a Fund Manager Exits?
Fund managers are the driving force behind the performance of a fund. When they quit, investors often panic and face a dilemma on whether they should continue or exit their investment.
It is hard to predict the impact on a mutual fund when its fund manager exits. There have been cases when it has led to substantial degradation of the fund’s performance. However, in other instances, a new fund manager was able to improve the funds’ returns significantly.
When a fund manager exits, it is important to keep an eye on the funds’ performance for several months. If it deteriorates significantly, it may be the time to exit and seek better investment prospects. However, short-term fluctuations should not be the deciding factor. This is normal, and a well-managed fund will perform better in the long term.
The role of a fund manager in mutual funds is vital. They implement strategies needed to assure growth and protection of investors’ money. However, they are not the sole deciding factor for a fund’s performance. Therefore, before investing in mutual funds, it is also important to analyse other factors like the fund’s risk levels, investment objectives and expense ratio.
FAQs about Role of Fund Manager in Mutual Funds
Does a fund’s manager switch often?
No, fund managers usually do not change very often. They are the core of a mutual fund since they devise the strategy on which the fund is based. A switch in fund managers means a shift in investment strategies and approaches.
Is a fund manager accountable to the investors?
Yes, a fund manager is liable to provide investors with regular updates regarding the funds’ performance. They are also responsible for addressing grievances and questions of the investors.
How important is the role of a fund manager in passive funds?
In passively managed funds, the role of a fund manager is to match the performance of the given benchmark with minimum errors. The fund manager’s role is more crucial for actively managed funds since they must select all the components by themselves.
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 4+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.