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," says Sreekanth Meenakshi , founder, fundsindia.com.
"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," says AV Srikanth, director, wealth management, Anand Rathi Wealth Advisors .
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," says K Ramalingam , chief financial planner and director, Holistic Investment Planners. 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," says Ramalingam.
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?
source:http://economictimes.indiatimes.com
Neeraj Rajgarhia
Summer Intern - Technical Analyst
DENIP Consultants Pvt. Ltd.
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