Understanding the Role of a Fund Manager

Investors should look into the fund manager's investment philosophy, strategies employed, and how they have navigated past market volatilities.

In Short

• Fund managers decide what securities a mutual fund buys or sells
• Their choices are shaped by fund goals, markets, research and analysis
• Strong managers balance risk and returns through timely portfolio changes

So far in this series, we have understood much about how a mutual fund works. However, at the heart of what it does--earn money for you--is a pivotal figure: the fund manager. Today, let’s understand the fund manager’s role, their impact on mutual fund performance, their importance in the selection process of a mutual fund, and what to consider when a fund manager changes.

So, what exactly does a fund manager do? What does ‘management’ mean in this context? A fund manager, also known as a portfolio manager, is responsible for making all the investment decisions for a mutual fund. They decide which securities to buy or sell and when to do so. These decisions are guided by the mutual fund’s objectives, the current market conditions, and in-depth research and analysis. Fund managers are tasked with the challenging role of navigating the complexities of the market to grow the fund's assets while mitigating risks. They are the strategists behind the allocation of fund assets across various investments, striving to achieve the best possible returns for the investors.

From this, it is quite clear how fund managers impact mutual fund performance. The performance is influenced by the decisions made by the fund manager and several other key factors. A skilled fund manager can significantly enhance the fund’s returns through strategic investment choices and timely adjustments to the portfolio. They employ various analytical tools and models to predict market movements and identify investment opportunities. Their ability to effectively manage risk while capitalising on market opportunities plays a crucial role in achieving the mutual fund’s investment objectives. Thus, the expertise, experience, and investment philosophy of the fund manager are critical in driving the fund’s performance.

So, as investors, should we consider the fund manager? When selecting a mutual fund, the track record and approach of the fund manager are of paramount importance. An experienced fund manager with a consistent performance history can be a strong indicator of the fund's potential success. Investors should look into the fund manager’s investment philosophy, strategies employed, and how they have navigated past market volatilities. Understanding the fund manager’s approach can help investors align their investment choices with their financial goals and risk tolerance. Hence, the fund manager becomes one of the few key factors in the decision-making process for selecting a mutual fund.

It’s important to recognize that while the fund manager plays a crucial role in determining a mutual fund’s investment strategy and decisions, they are often supported by a dedicated research team, especially in larger funds. This team comprises analysts who specialise in various sectors, regions, and asset classes, providing in-depth research and analysis to inform the fund manager’s decisions. They closely monitor market trends, economic indicators, and individual securities, delivering valuable insights that help the fund manager assess investment opportunities and risks. This collaborative effort enables the fund manager to make more informed decisions.

However, investors should be aware that a fund manager is doing a job, and move on. The departure of a fund manager can lead to uncertainties regarding a mutual fund’s future performance. When a fund manager changes, it’s essential for investors to stay informed of the reasons behind the change and the credentials of the incoming fund manager. Fund houses usually announce these changes through official communications. They should also evaluate the new manager’s past performance (if available) and investment style to assess it. Most importantly, they should observe the fund’s performance under the new management before making any hasty decisions. Sometimes, it requires time to judge.

All things considered, a fund manager’s role is critical in guiding the direction and performance of a mutual fund. Their expertise and decisions significantly impact achieving investment objectives. Thus, it is vital for investors to understand the fund manager’s role, their impact on fund performance, and their importance in the mutual fund selection process. Additionally, being prepared for and knowing how to respond to changes in fund management can help investors navigate their investment journey more smoothly.

Dhirendra Kumar is India’s foremost expert on mutual funds and personal finance. He is the founder and CEO of Value Research, India’s leading source of investment information and research since 1990.

Disclaimer: The views expressed are the author’s own views and not necessarily those of UTI Asset Management Company Limited. The views are not an investment advice and investors should obtain their own independent advice before taking a decision to invest in any asset class or instruments. Past performance may or may not be sustained in the future.

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