Common Mistakes of Mutual Fund Managers & What to Watch For

Mutual fund managers have a lot of responsibility when it comes to taking care of a mutual fund. Since they are human, they have been known to make mistakes just like everyone else. Here are a few mistakes that mutual fund managers sometimes make.

1. Moving to Wrong Assets

Many mutual funds utilize an approach that involves investing in several types of assets. For example, they might put a portion of the funds into stocks and another portion into bonds. Some mutual funds allow the fund manager to change the asset allocation of the fund based on what they believe. If the fund manager believes that the stock market is going to decline, they might take a good portion of the money that is involved in stocks and transfer it over to bonds. In this way, they are hoping to shield the portfolio from losses and preserve the capital. If the market does not behave like the fund manager believed, they could potentially be missing out on a lot of profits for the fund.

2. Choosing Wrong Sector

Another mistake that many mutual fund managers make is that they put money into the wrong sector of the economy. Many fund managers try to practice sector rotation in their portfolios. They move money from one sector to another based on what they believe the sector is going to do. If they choose the wrong sector, they are potentially going to be losing a lot of money for the portfolio overall.

3. Choosing Wrong Stocks

Even though diversification helps the mutual fund overcome the selection of a few bad stocks, some fund managers are very bad at choosing stocks and end up hurting the fund. By investing in hundreds of different stocks, you can negate the impact of one company going into bankruptcy. However, if you choose several companies that go bankrupt or decline rapidly in value, it is going to hurt the performance of the fund. If the fund manager does this long enough, they are going to be out of a job.

4. Tax Implications

Some mutual fund managers make the mistake of trying to manage their portfolios too actively. They buy and sell stocks so regularly that they create a lot of capital gains tax issues for their investors. If the fund manager would employ a more long-term style, they could avoid a lot of these capital gains taxes that their investors are having to pay.

5. Not Beating the Benchmark

One of the most important things for a mutual fund is to beat the benchmark that they are comparing themselves to. If you want to attract investors as a mutual fund, you need to be able to consistently beat the benchmark. The benchmark is a financial index that is used for comparison purposes of the fund. If you are a fund manager and you cannot beat the benchmark regularly, you are going to most likely be out of a job.