In the past, the only way people could invest in mutual funds was through offline advisors. But thanks to the internet, you can now start investing in mutual funds online within a few minutes.
While investing in mutual funds is now easier than ever, what happens after you invest? How do fund managers manage your money? After all, management directly impacts the fund’s performance. As a savvy investor, it is essential to have a brief understanding of how fund managers invest your money.
Here is a quick overview of the entire process:
Investment Strategies Used by Mutual Fund Managers
Fund managers are experienced financial professionals who are responsible for managing the investments a mutual fund scheme receives from the investors. Fund managers use a few popular investment strategies, such as;
- Bottom-up or Top-down Approach
These are two of the most popular approaches. In the bottom-up strategy, stocks or other securities are picked as per their fundamentals, irrespective of what the overall economy of the country is. In the top-down approach, fund managers and their analysts analyse the country’s economy to pick sectors and companies with the maximum potential. - Technical Analysis
This sort of approach involves analysing stocks based on technical parameters such as their past performance. Apart from that, some managers also combine this with a fundamental analysis of the company just like in a bottom-up approach. - Dividend Analysis
Slightly conservative, this sort of approach suits investors that are looking at earning regular earnings from their investments through dividends. In this approach, managers look at stocks that pay regular dividends. - Against the Tide
This approach is slightly contrarian in style. Investors look at stocks that are not performing well but have good valuation. This style of investing usually carries a high-return potential but comes with high risk too.
Fund Management Framework
Every Asset Management Company (AMC) or fund house has a management framework for each of its schemes. The framework comprises rules and processes regarding securities-picking, profit/loss booking, sectoral exposure, cash holding, churning, and more. It also includes regulatory restrictions imposed by SEBI and other financial authorities.
It is the responsibility of the fund manager to follow this framework while making any investment decisions. Creating such management frameworks is also important for the fund house in case if a fund manager decides to exit from the scheme. This ensures that the scheme will not collapse and continue to perform even under the new manager.
Mandate of the Mutual Fund Scheme
Another vital aspect of how fund managers manage your money is the mandate of the scheme. Every mutual fund scheme has a mandate that the managers cannot ignore when selecting securities for building the mutual fund portfolio. For instance, if a particular mutual fund scheme invests in large-cap stocks, fund managers cannot invest your money in mid-cap or small-cap stocks.
As per the SEBI regulations, mutual funds schemes can never deviate from their mandate. As long as the mandate is being fulfilled, fund managers have complete flexibility with regard to buying and selling stocks or other securities.
The Fund Management Team
While fund managers are the face of every mutual fund scheme, they have a team of chief investment officer, researchers, and analysts who help them with the investment and portfolio management process. It is the team’s responsibility to find securities that meet the investment strategy and mandate of the scheme.
Even after the investment is made, the management team will continue to monitor its performance to ensure that it delivers the expected returns. While the fund manager makes the final decisions, the management team’s role is also very critical in the success of any mutual fund scheme.
How to Evaluate Fund Managers?
As can be seen above, fund managers play a vital role in any mutual fund scheme’s success. So, it is necessary for investors to also evaluate the scheme’s fund manager before making the investment decision. While this does not guarantee that a mutual fund scheme will deliver higher returns, their evaluation is a sure way to analyse a scheme’s overall potential better.
So, how should you evaluate fund managers before making a mutual fund investment? Here are the points you should look out for:
- The ability of the fund manager to help the scheme beat its benchmark consistently.
- General volatility of the fund compared to the major indices.
- The total turnover of the scheme compared to other similar schemes from the same fund category.
- Experience of the manager in managing the current scheme and similar schemes in the past.
Being a Smart Mutual Fund Investor
By enabling you to access the expertise and experience of fund managers, mutual funds make it easier for you to begin your investment journey. Moreover, with so many different types of mutual funds now available, every investor can now find a scheme that perfectly meets their risk appetite and investment objective.
Understanding how fund managers work will take you a step closer to becoming a smart and knowledgeable investor. Now that you know how fund managers work and how you can analyse them, use this knowledge when evaluating mutual fund schemes for your investment.
Original Source: Aditya Birla Capita