Change in management due to merger: The asset management companies (AMCs) of mutual funds can merge to form a single entity. All fund mergers are subject to approval from the Securities and Exchange Board of India and must conform to the regulator’s guidelines. Generally, mergers are seen as being beneficial because they improve a fund’s efficiency through enhanced skills, lower costs and reduced competition. But investors must consider how their rights are affected by this merger.
Change in fund manager: Good fund managers operate with a long-term perspective and believe in consistency. If a fund manager of an actively managed fund is changed, it can affect its performance. Investors must consider the performance record of the new fund manager, his qualifications and previous fund management experiences. One must also look for the transaction cost history of the new fund manager. A high transaction cost implies excessive trading, which can be bad. In case of passively managed funds, changing the fund manager does not impact their future performance considerably.
The fund house philosophy is also important in this regard. Often, a fund manager has to follow the investing style of the AMC as well as the stated investment objective of the fund.
Changes in assets under management: Fund size can also affect the performance. A fund with large assets can derive benefits of economies of scale and lower expense ratios. However, some fund managers are comfortable managing mid-size funds and any increase in their assets under management (AUM) can negatively affect the performance. This is because rising assets become unmanageable after a point, which leads to inefficiencies. Investors must watch out for changes in a fund’s AUM to ensure that the value of their investments does not suffer due to sub-optimal fund size.
Changes in portfolio statistics: How a fund has performed against its benchmark can be judged by looking at its beta and r-square values. These statistics are calculated on a quarterly, semi-annually or yearly basis. If such statistics are showing variations over time, it is an indication to review your investment. Falling beta and r-square imply that the fund is not tracking its benchmark. If the beta value is consistently at 1 (and the r square is high), it implies that the fund is closely tracking its benchmark index. These statistics are readily available on mutual fund portals such as valueresearchonline.com and myplexus.com.
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