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Check your manager

A good fund manager is critical to assessing the risk-return potential of the fund.

Shruti Kohli        Print Edition: November 13, 2008

There are several factors that should be considered before investing in a mutual fund, one of the most important being its risk-return potential. One way to ascertain the returns that a fund might deliver or the risk it entails is to analyse its past performance. While it may not be completely indicative of its future performance, comparison with a benchmark or similar funds helps gauge its prospects. More importantly, the past performance helps to determine the expertise of the fund manager. In fact, a good fund manager is critical to assessing the risk-return potential of the fund. Which is why you should pay greater heed while choosing your fund manager.

Importance of a fund manager: If you want to invest money in the financial markets, you look for advice from an expert. You seek a financial planner or broker who will help you pick a good stock and decide the amount you need to invest. If he goes wrong, you lose your money. So you choose your financial planner with care, studying his track record to make sure that the chances of your losing money are minimised.

However, when it comes to a mutual fund, the fund manager is often ignored even though he plays the same role as a financial planner. He handles your money and takes all decisions related to investing it. The returns and risks of your investment depend on his skills. He picks the stocks, switches between them or holds cash depending on the market conditions. A wrong move by him can adversely affect your returns. So it is imperative to have a good fund manager.

Check his profile: Before you invest in an MF scheme, check the fund manager’s record along with the fund’s past returns and risk. If he has been changing jobs too frequently, it might not be a good sign. The longer a person has managed a fund, the better it is for the scheme. If he has taken over a particular fund recently, check his past stints, the funds he has handled, the returns those funds have delivered and the manner in which they were rated.

Study his style: It is important to tune in to the investment style of your fund manager. So study his approach to picking a stock, the extent to which he researches the companies, the frequency with which he churns the portfolio and his skill in interpreting market moods. You also need to know if his choice of stocks is in sync with your investment objectives. This information is present in the fact sheets available with the fund houses and posted on their Websites.

Reputation of a fund: The fund manager’s proficiency determines the fund’s reputation. Take the HDFC Equity fund. Fund manager Prashant Jain pulled out all the money from the IT stocks just before the dotcom bust in 2000. His move saved the investors’ money—and is one of the reasons the fund is still a favourite with distributors despite there being better funds in the market.

Previous instalment: What’s in a NAV?; Next issue: The Offer Document

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