The stock market rally, which began its upward swing from mid-2004 and scaled a never-before-seen peak by December 2004, witnessed a steep rise in stock prices.
Equity funds were not far behind. A lot of them did very well. Of course, while the general uptrend in stock prices was largely responsible for this growth, the fund manager's role in identifying the right stock cannot be undermined.
So what do you look for while identifying a good fund manager?
An equity fund from any Asset Management Company (AMC) must be evaluated on various parameters like risk-return trade off, investment objective, fund manager performance, expenses, etc.
Here we evaluate one of these parameters, i.e. the fund manager.
1. Investment style
Before investing in a scheme from any AMC, it is important for an individual to know the investment style of the fund manager for that scheme. Is the fund manager driven by his own individualistic style while taking investment decisions or are there processes and systems in place to make investments?
Investors who are not game for any surprises later would like to see their fund manager have a well-defined investment plan for making investments.
This is so that they can make up their minds on whether to invest in schemes managed by the said fund manager or not.
2. Does the fund manager adhere to his mandate?
It is common knowledge that every mutual fund scheme has an investment objective, which becomes the fund manager's mandate. But the million-dollar question here is does he abide by the mandate?
While 'flavours of the day' may come and go over a period of time, it is important that the fund manager adheres to his mandate and doesn't get caught in 'heeding the call of the markets.'
3. Does your fund manager 'walk the talk'?
Another noteworthy point to be considered: does your fund manager invest in his own mutual fund schemes? It's one thing to systematically plan how to invest other people's money and totally another to actually apply the same plan to one's own money.
In India, unlike in the United States, it's not mandatory to report whether the fund manager invests his own money in the schemes he manages. But we, at Personalfn, always make it a point to ask fund managers in all our interviews, whether they invest money in their own funds.
In the US, investors want to know 'whether the fund manager eats his own cooking?'
4. 'One-man army' or 'team player?'
It is always advisable to check beforehand the number of schemes your fund manager is handling. If the fund manager has a team of analysts in place, then even a larger number of schemes under him would seem fine.
While there is no definite number or ideal team size, it helps if there are enough members in the fund management team so as to make any one of them dispensable. In other words, it is important for the team to be large enough to make the individual irrelevant.
5. History of managing funds
Every fund manager has a certain style of stock picking. Studying the fund manager's history will give an individual a clearer picture of the fund manager's investment style.
Is the fund manager prone to picking aggressive stocks? Or does he have a conservative attitude? Either ways, has it worked for him in terms of superior returns at lower risk?
Individuals can determine this after studying the previous funds managed by him either in the same or a previous AMC.
6. Is your fund manager an AMC hopper?
This point assumes significance from an investor's point of view. Investors should ideally select the AMC investment philosophy rather than a particular fund manager working with the AMC.
This is crucial because it lowers risk for the investor in case the fund manager were to quit the AMC. It is always 'safer' to select an AMC that has a strong, process-driven investment style and the fund manager's role is to perform within the parameters defined by the AMC.
The fund manager should be able to seamlessly enter and exit from the AMC without disturbing the process. This way, an AMC can isolate itself from the fund manager to an extent, which helps in mitigating the risks to the investor in the event of the fund manager leaving.
All in all, fund managers have the potential to turn mutual fund schemes into trailblazers for those who have invested in them. But there's a flipside to it; the 'potential high returns' might go awry for those who haven't done their homework before selecting the right fund manager.
Analyse your fund manager well before taking a call on which fund to invest in. After all, it's your hard-earned money going into the scheme, isn't it?
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