Your Mutual Fund Manager Might Not Be A Wizard. And That's A Good Thing — BQ Learning

A fund manager is an important factor in an actively managed mutual fund. A lot of investors even select schemes in their portfolio based on who the fund manager is.

So, when the fund manager leaves, the investor also worries whether it’s wise to continue with the scheme. But does such decision-making bring an unintended bias into the investment process?

Let us take a real-life example as to how the attraction of a star fund manager works.

Consider Fund A and Fund B with long-term performance as below:

Over the long term, it is difficult to set the two apart. Fund A is HDFC Flexicap launched in 1995, while Fund B is DSP Flexicap launched in 1997.

On all fronts, the funds are nearly the same with just one notable point that till recently Prashant Jain used to manage HDFC Flexicap Fund. The only other difference between the two being that HDFC Flexicap has assets under management of Rs 26,000 crore as of June 2022, while DSP Flexicap managed just Rs 6,800 crore.

There are multiple factors that contribute to higher assets under management for a scheme. Among them, the past performance and the fund manager are the two important ones. Looking through a lot of investor portfolios, it is clearly visible that many tend to gravitate towards popular funds that have performed well.

Are you one of those? Remember, investing is just one part. The key is to monitor the portfolio and make changes at relevant occasions, especially after a star fund manager has left.

Investors tend to believe that the performance of the fund is based only on the decisions made by the fund manager who is a wizard at selecting the right stocks at the right time.

The reality is much different as there is an entire team of analysts, researchers and fund managers to take and then implement decisions.

Every fund manager has a distinctive style but part of this is also subsumed within the entire structure and process that mutual fund houses create to ensure continuity in operations.

What then explains the attention that fund managers get when they leave? It is the reason for a wave of worry among unit-holders, whether their fund will keep up its stellar performance.

The ideal thing is to consider the style of investment of the fund and then look for any deviation in this regard under the new fund manager. It is also likely that it could be months, and sometimes even a year or two, before the new fund manager starts to have a meaningful impact on the portfolio selection, especially in large-sized schemes.

A lot of investors perk up when the news of a fund manager’s exit hits the headlines. And then, after a few days as interest dies, they go back to their normal routine forgetting the process of monitoring the fund.

Avoiding this is the key to keeping your portfolio strong and contemporary over the longer term. The best thing is to watch the fund performance, portfolio changes and the style of management. This can save you from the negative consequences of getting stuck with holdings that are out of date.

(The writer is founder, Moneyeduschool)