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DYK: What your mutual fund manager does

The investment objective of the scheme defines the universe in which securities can be picked. That done, the fund manager makes the buy and sell decisions on the basis of research and analysis

When you invest in a mutual fund scheme, you are buying a portfolio of securities. This portfolio can be either passive or active. If this portfolio is passive, it mirrors an established index and its constituents are picked in line with the underlying index. If it is actively managed, a fund manager picks the constituents of the portfolio. Fund managers are critical to the performance of active mutual funds. Here’s a look at what all your fund manager is responsible for.

ASSET ALLOCATION

Every fund has a defined investment objective, which decides not only the asset type, but also the general theme within which a fund manager can select securities. However, the investment in assets is defined within a range. For example, many hybrid funds that have a mix of equity and debt—like monthly income plans—specify that 0-20% of the assets under management can be in equity and the rest in debt securities. The fund manager can decide whether to invest 5% or 20% in equities. Also, as most of the funds are open-ended and see inflows and outflows on a daily basis, it is the fund manager who will decide how much gets invested and what remains in cash.

The decisions around exposure to a particular asset class refer to asset allocation, which is vital to the fund’s performance.

SECURITIES SELECTION

This is the primary responsibility of a fund manager. The investment objective of the scheme defines the universe in which securities can be picked. That done, the fund manager makes the buy and sell decisions on the basis of research and analysis. This is known as portfolio construction, and is heavily dependent on the fund manager’s skill.

RESEARCH AND ANALYSIS

To build a portfolio of securities that can consistently outperform its benchmark and standout in a peer set, the fund manager needs in-depth analysis. Most fund houses have teams of analysts that help the manager with research in areas like securities, sectors and macroeconomic factors. The fund manager has to take the final decision on stock selection, which is taken after weighing all the research findings.

PERFORMANCE REVIEW

Fund managers are answerable to investors as well as the trustees of the asset management company, who are appointed to ensure that investor interest remains a priority. Hence, they need to have a good rationale for their investment decisions and should be able to communicate these verbally and formally across various forums.

They also have the statutory responsibilities of maintaining ethical conduct while handling investor money. While it’s not expressly spelt out, one of the softer responsibilities of a fund manager is to meet investors and distributors to promote their funds.

Investment committees and analyst teams regularly assist fund managers, and rarely do they work in isolation. Nevertheless, from the perspective of a mutual fund investor, a fund manager’s skill and investment style are key to their product’s performance.

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