What is the role of fund managers in mutual funds?

Is a mighty ship good enough even if the captain is not worthy?! No, even the mighty Titanic sank because of the error in judgement of the captain of the ship.

A fund manager can be considered to be the captain of the mutual fund that navigates through the market fluctuations to realise the ultimate goal of maximizing the investor’s wealth. 

Who is a fund manager?

Fund manager in the most simple terms is the person who manages the fund and is responsible for the performance of the fund in the short term and the long term.

These fund managers are required to have good managerial skills apart from a good educational background, thorough knowledge of the market and economic trends, various policies and compliance requirements to manage the fund effectively. 

There can be one or more fund managers to manage a mutual fund besides having  a team of professional analysts that monitor the market trends and assist the fund manager in making sound investment decisions. 

What is the role or functions of a fund manager?

The role of the fund manager depends on the type of fund whether it is actively managed or passively managed. In case of an actively managed fund, the role of the fund manager is more crucial as the sole objective of the fund is to outperform the market. Whereas, in case of a passively managed fund, the fund manager is required to meet or match the returns of the underlying index it tracks with minimum possible errors known as tracking errors. 

Some of the key functions of the fund managers are discussed below.

• Wealth creation and protection

The fundamental job or function of the fund manager is the wealth creation and protection of such wealth if the investor. The fund manager uses a variety of techniques and tools involving fundamental and technical analysis of the investments and the stocks to meet this requirement. Fund managers can use the help of various assistants having a good knowledge to analyse the technical data. Another important aspect is to ensure that the portfolio is diversified enough to mitigate the risks but not dilute the returns. 

• Monitor the performance of the fund

Only selecting the investments or stocks to invest is not enough, the fund manager has to constantly monitor such assets to ensure that the core objective of the fund and the investor portfolios are met. This continuous monitoring helps them in making sound decisions to enter or exit the market with the sole aim to maximise the investor’s wealth. 

• Compliance with various regulations

Compliance with the various regulators like SEBI, and other authorities is another important aspect of the role of fund managers. There are various guidelines laid down by SEBI with respect to various aspects of the fund like reporting, expense ratios, redemption of fund, etc. The fund manager has to ensure the compliance with all such requirements of the competent authorities and the Acts in force. 

• Supervision of duties delegated to third parties

Supervision is the key to meeting all the requirements or expectations from the fund managers. There are multiple occasions where many tasks of the fund managers are delegated to assistants or third parties. Supervision of such tasks and ensuring they are error free is the responsibility of the fund manager.  

How are the fund managers evaluated?

Fund managers are evaluated on a constant basis. This evaluation can be done by financial experts, investors, peers, etc. The basis of this evaluation can be taking into consideration various factors. Some of such factors can be 

• The performance of the fund against the benchmark
• The overall experience of the fund manager
• Qualifications of the fund manager
• Investment style
• Various other members of the team
• Comparison of various ratios, returns and expenses with peer funds, etc.

Is it necessary to exit the fund if the fund manager exits?

Fund managers are the driving force behind the performance of any mutual fund. Therefore, often the investors are faced with a dilemma to continue or exit the fund if the fund manager is no longer part of such a fund. There is no correct or standard answer to this question or doubt. There have been cases where the exit of the fund manager has severely affected the performance of the fund or an inclusion of a new fund manager has brought in a new life to the fund.

The investors in such cases should monitor the performance of the fund for the following couple of months or a year. If the performance of the fund takes an adverse hit, it is advisable to exit the fund and look for better investment opportunities. It is important to note that a temporary slump in the value of the fund is normal for even a well managed and a steady portfolio of a fund. However, a fund with sound assets is bound to perform better in aling run and ensure maximum returns to the investors. 

Conclusion

While it is essential to get the information of the fund managers to make investment decisions, it cannot be the sole parameter for the same. The performance of the fund is the responsibility of the fund manager but the decision to quit the fund cannot be solely due to change in the leadership. Investors have to look into the evaluation of the fund based on its historical returns as well as the evaluation of the fund managers which is done on a constant basis by many financial planners, distributors or investors. 

FAQs on mutual fund managers

1. What is the role of a fund manager in passively managed funds?
The role of the fund manager in passively managed funds is to meet the performance of the underlying index or benchmark it tracks while ensuring that the tracking errors are reduced to a minimum extent. 

2. Is the expense ratio of actively managed funds higher than passively managed funds?
Yes. Actively managed funds require the fund managers to make sound investment decisions that result in outperforming the benchmark and generating higher returns for the investors. This requires higher efforts and expertise of the fund managers along with other resources which are used actively for better performance of the fund. This eventually translates into higher expense ratio as compared to passively managed funds.