Monday, January 22, 2007

Work your Way up with your Wealth building Winners! (Contd.)

Work your Way up with your Wealth building Winners! (Contd.)

Mirror, mirror on the wall, which is the best Fund of them all?
This seems to be the daunting question in the minds of all investors planning to park their money in Mutual Funds. The answer lies in systematically scouting for consistent performers with sound credentials.

Performance Evaluation of Mutual Funds

Reputation of the Asset Management Company and that of the Fund Manager is of paramount importance in evaluating a Fund. Selecting the right Fund can be quite challenging. There are two reasons for that - one is the large number of Funds in India today that could confuse you. The other reason stems from the first - more Funds imply more homework on your part. To identify the right Fund, you need to see how the Fund measures up on the following parameters.

Fund's background

Check out as to whether the sponsors have adequate fund management experience, are conservative and innovative and have a clean slate untainted by scams and financial irregularities.

The Fund house's overall performance

Even if you wish to invest in just one scheme of the fund house, you must check to see how the fund house is performing as a whole.

Fund manager's track record

The following factors will aid you in gauging the ability of the fund manager to demonstrate sterling performance.

History of managing funds
You can determine how effective a Fund Manager has been in earning superior returns at lower risk after studying the previous funds managed by him either in the same or a previous AMC.

Adherence to mandate
It is common knowledge that every mutual fund scheme has an investment objective, which becomes the fund manager’s mandate. But the million-dollar question is does he abide by the mandate?

Investment by the Fund Manager in his own schemes
It is one thing to systematically plan how to invest other people’s money and totally another to actually apply the same plan to one’s own money. In India, unlike in the USA, it is not mandatory to report whether the fund manager invests his own money in the schemes he manages.

Process-driven or Fund Manager-driven
Is the fund manager driven by his own individualistic style while taking investment decisions or are there processes and systems in place to make investments? Looking at the fund’s trailing 5-10 months’ portfolios will allow you to understand the fund manager’s style of investment over a period of time. A fund manager’s investment philosophy (concentrated bets, diversified portfolio, large caps, mid caps) gives the fund a particular risk profile. It is always ‘safer’ to select an AMC that has a strong, process-driven investment style and the fund manager’s role is to perform within the parameters defined by the AMC. The fund manager should be able to seamlessly enter and exit from the AMC without disturbing the process. It is advisable to check the number of schemes your fund manager is handling. If the fund manager has a team of analysts in place, then even a larger number of schemes under him would seem fine. While there is no definite number or ideal team size, it helps if there are enough members in the fund management team so that no individual is indispensable.

Risk mitigation is a very critical part of fund management and its primary objective. Delivering growth comes after that and is therefore the secondary objective. Both these objectives are tested vigorously across bull and bear phases. And more often than not, you will find the process-driven funds redeeming themselves on both these criteria more than the ‘fund-manager’ driven funds. From your perspective, the moot point is – how does one identify a strong process-driven mutual fund? You can do that by looking at consistency in the fund’s performance across a longer time-frame of 3-5 years. More importantly, within this period, try to see how the fund has done across bullish and bearish phases. In a strong process-driven mutual fund you will find that even if a fund has not done exceedingly well in a bull run, it would have mitigated losses in a bearish phase. The reason behind this is disciplined fund management, a rare trait in the industry.

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