What’s in the blog?
This article shows why a fund manager’s experience, strategy, and decision-making style are critical to mutual fund performance. It explains how to evaluate their expertise, like track record, risk control, and investment philosophy to help you make smarter investment choices.
Table of Contents
With over 1,500 mutual fund schemes available in the market and a constant influx of New Fund Offers (NFOs), selecting a mutual fund feels overwhelming. Isn’t it?
Investors willing to make informed decisions often check the past performance of the funds. They may even do a quick check on the expense ratio. That’s a really good thing to do. But, there’s a very important aspect that even smart investors often miss to consider – the role of the fund manager!
Yes, you read that right; when you truly want to understand a mutual fund’s performance it is important to understand the role of the fund manager. The experience, investment philosophies, and decision-making process of a fund manager are very important indicators of the performance of funds managed by them.
Why Fund Managers Matter?
If you want a straightforward one-liner answer to this question – fund managers are important because it is their expertise in making the investment decisions that dictate the performance of funds managed by them. Let us understand this in a little more detail.
Investment Philosophies and Strategies
A fund manager is the one who makes all the decisions for a fund so it’s a no-brainer that their philosophies and strategies dictate the performance of a fund. When you understand the approach (growth vs. value) of a fund manager you can choose the one that aligns with your financial goals.
Experience in Navigating Market Cycles
An experienced fund manager who has seen various market conditions, including boom, recession, and volatility is most likely to navigate these better than an inexperienced one. They would know when to act and when to hold.
Experience in Managing Funds
It’s not only experience of different market conditions but also the experience of managing funds that’s important for you to understand. The way you try to understand the past performance of a fund, why not do the same with a fund manager? A fund manager’s performance with their previous funds is a great indicator of their ability to generate future returns.
How to Evaluate a Fund Manager’s Experience?
By now you have very well understood that evaluating a fund manager’s experience is as important as evaluating a mutual fund’s performance. Before investing your hard-earned money in any fund you need to be sure that you are putting your money in the right hands. You need to ensure that the fund manager has the skills and expertise to handle any market situation and protect your capital. But, how do you do that? Let’s see.
Industry Experience
One of the most important parameters to evaluate a fund manager’s experience is their industry experience. To understand the industry experience you can check the following –
- Years in the Market – A fund manager with 10+ years of experience has most likely seen both boom and crash. With this exposure, they are most likely to make informed decisions based on past trends.
- Previous Roles and the Background – Fund managers typically start as research analysts, portfolio managers, or work in institutional fund management before managing retail mutual funds. A diverse background is an indicator of a deep understanding of the financial markets.
- Handling Different Funds – If a fund manager has experience overseeing multiple types of funds (such as equity, debt, or hybrid funds), they most likely have the expertise to adapt to different market scenarios.
Investment Philosophy and Style
Another important thing that you need to pay attention to is the investment philosophy and style of the fund manager. To understand this better you can try looking from the following angles.
- Growth vs. Value Investing – It is important to understand whether a fund manager is growth-oriented or value-oriented. This will help you align your expectations with the fund’s strategy. Managers with growth inclination invest in companies expected to grow quickly while value investors go for underpriced stocks with potential.
- Active vs. Passive Management – Some managers manage funds actively by picking stocks based on their research while others passively track an index. Actively managed funds can generate higher returns but they carry higher risk as well.
- Consistency in Strategy – You must check if a fund manager stays consistent with their strategy or changes their strategies frequently based on short-term market movement. A fund manager not consistent with their strategy may not be a good choice for a volatile market condition.
Risk Management Approach
You are going to trust someone to handle your investment for the long term so you must understand their risk management approach. This can be understood by analyzing from the given angles.
- Handling Market Downturns – A good fund manager is not someone who can bring high returns when the market goes up but someone who can minimize losses and keep your capital safe during market downturns. You must check how a fund performs during market corrections.
- Risk-Adjusted Returns – Instead of just checking the returns of a fund you must check the returns against the risk taken to bring that return. You can utilize tools like the Sharpe ratio to see if the fund manager takes reckless risks to bring high returns.
- Portfolio Turnover – If a fund manager frequently buys and sells stocks then they are doing aggressive trading. And, this always comes with an added cost. A lower portfolio turnover shows that the fund manager has a more thoughtful long-term investment approach.
Performance Benchmark and Comparison
Once you understand the experience and approach of a fund manager you should also compare their performance with others to be double sure that you are choosing the right one. You can do the comparison in the following ways.
- Long-Term vs. Short-Term Performance – It’s easy to get excited seeing a recent good performance. But, you should always think long-term when investing. Look at 3-years, 5-years, and 10-years performance trends. A consistent return is more important than occasional high returns.
- Comparison with Benchmark Index and Peers – A strong fund manager should outperform the benchmark index and also other funds in the same category.
- Respecting the Investment Mandate – Some fund manager chase high returns temporarily by taking risks beyond their mandate. You must ensure that you choose a fund manager who respects their investment mandate and does not chase high returns at the expense of safety.
My Take
Investing in mutual funds is like getting into a long-term relationship – you are trusting someone to manage your money. So, it’s really important to understand whom you are trusting and why are you doing so. When you know your fund manager you can confidently trust their decision.
If you still have a question regarding the credibility and strategy of a mutual fund manager, feel free to drop your query in the comment section below. We are here to help you easily navigate your financial journey. Always remember, patience and informed decisions lead to sustainable wealth growth.
