Understanding the Role of a Fund Manager in Mutual Funds

If you ever perused through a mutual fund scheme document, you would have definitely come across the smiling face of a fund manager; with his qualification and expertise neatly summarised. Ever wondered why this information is useful for you? I mean as long as the scheme document mentions the essentials about the fund like past returns, fund objective, stock selection criteria, etc are mentioned, it should suffice, right? Not quite true. For a mutual fund investor, as important it is to know about the vitals of a scheme, so is knowing about the fund manager; the person responsible for steering the fund strategy. Before we delve deeper into why a fund manager plays a vital role in the success of a mutual fund, let’s understand his role. Read on!

What is the Role of a Fund Manager 

Let me explain the role of a fund manager with a simple analogy. Consider your mutual fund as a big ship. Then the sea as the equity market. Then the fund manager is the captain of this ship. This captain is responsible to steer your capital to safety towards the end goal of growth. Now how well the ship survives the turbulent sea is based on what decisions the captain takes; when to hoist the sails and when to drop the anchor. 

If this analogy is clear, you will be able to fathom how important a fund manager is. A fund manager is a professionally qualified individual who keeps a close eye on the market, economic trends, policies, etc. which have an impact on the stock market. He attempts to beat the performance of the benchmark and competitor funds in the market. Needless to say, asset management companies bank upon the experience and track record of a fund manager to sell their funds. 

When it comes to passively managed funds, fund managers invest in a basket of securities that mirror the index, and their role isn’t as prominent as in actively managed funds, where they try to beat the benchmark, by taking on extra risk to reward investors. 

How Does The Fund Manager Navigate Risks? 

There could be several risks that your mutual fund investments are exposed to such as market risks, business risk, currency risk, etc. This risk in question here comprises of market risk, business risk, currency risk, etc. Market risk isn’t something under the control of the investor. It is based on macro factors such as the economy, global crisis, trends, politics, policies, etc. Business risk is particular to the industry and the respective companies. 

When it comes to business risk, there is a plethora of information available on the web on companies, especially the larger ones, which you and I as individuals can also access and use to invest in the stock market. 

But what about the small and mid-cap companies about which we don’t know much about?

The fund manager through meetings/ conversations with the top management understands the business and the plan of these companies. On evaluating their potential, the fund manager takes a call to include those stocks in the portfolio, while aiming to deliver the extra delta to investors by taking a higher risk.

Can You And I Assess Risk And Evaluate Stocks The Way Fund Managers Do?

The answer is that we neither have access to such information nor do we have the expertise and qualification to take decisions keeping in mind both macro and sector-related information.

They also monitor the performance of funds with the assistance of an entire team of researchers and analysts who keep a close watch on markets and companies. They churn stocks from the portfolio based on their outlook and reallocate funds to companies that will benefit investors in the long run.

Apart from this, when you go via the route of a mutual fund you can also invest in feeder funds across the globe, as the fund manager has local and stock-specific information of those markets.

So, Should I Redeem My Mutual Fund Units Once The Fund Manager Quits?  

This is a question that plagues many investors and understandably so. While the importance of a fund manager can’t be overlooked, a fund manager quitting shouldn’t send investors in frenzy and doesn’t necessarily warrant redemption. It is quite difficult to quantify the actual impact on the performance of a fund once a fund manager steps down. There have been cases when a fund manager’s exit has led to a slowdown in the performance of a fund, however, in many cases, a new fund manager was able to substantially improve the performance as well

When a fund manager quits, keep a close watch on the fund’s performance for a few months. If the fund performance deteriorates, reevaluate your portfolio. Please note short term underperformance should not be the basis of your investment decision. Fluctuations are common in the market, and a well-managed fund will come out on top in the long-term.

To sum up, a fund manager plays a vital role in implementing the fund strategy and does his best in ensuring both the protection and growth of your capital. That being said, the performance of the fund does not lie solely on the shoulders of a fund manager but also on various market parameters he has little to no control over. If a fund manager quits, do not redeem your fund units in haste fearing a loss. Be patient and analyze performance objectively before taking redemption decisions. 

Happy Investing!

Disclaimer:This blog has been written by the Content Desk at Sundaram Mutual Fund. The views expressed in this post are that of the author and not those of Groww