My article in Mid-day Mumbai (Gujarati) edition today:
http://epaper.gujaratimidday.com//epaperpdf/gmd/12012015/12012015-md-gm-12.pdf
The English translation is as under:
As we know, a mutual fund is a
vehicle through which an investor can invest into various investment options.
By putting money into a mutual fund, an investor hires the services of a
professional fund manager. We hire the services of a professional manager in
many walks of our life, e.g. hiring a lawyer to fight a legal case, hiring an
accountant to write books of accounts, hiring a travel agency to arrange a
vacation. One can do many of these things oneself, but still many times hiring
a professional is a better choice. While a business owner may have great
knowledge of accounting, one still hires the services of an accountant so that
she may concentrate on the broader aspects of managing her business. Same thing
applies to managing your money also.
The underlying principle behind
the above scenarios is the same: Do what you know the best. Hire smart people
for the rest.
A professional fund manager
offers expertise in selection of securities after careful analysis of various
aspects of the economy, the industry, the company, the security, etc. While you
do what you are best at and what you love to do, the fund manager spends most
of the time in this business of managing other people’s money. Thus, investment
through mutual funds offers us the ability to benefit from full time use of the
expertise of a fund manager.
Investment is a risky business.
Some risks need to be avoided but some of the other risks need to be understood
and carefully managed. It is the management of such risks where the expertise
of a good fund manager comes in the play.
A good fund manager stays away
from making some of the common mistakes made by investors at large. Which are
these mistakes?
1. Investing
in too many stocks – too much diversification
2. Investing
in too few stocks – high degree of concentration
3. Investing
across various related businesses
4. Not
having an investment plan or policy
5. Not
sticking to a plan, if at all one has
6. Chasing
the recent period winners
7. Following
stock price and not the company performance
8. Relying
on tips rather than research
Let us remember that a fund
manager is also a human being and likely to fall prey to some of the mistakes
on certain occasions. However, being a professional doing the job full time
makes the fund manager understand these situations better. On top of this, the
fund house would have its own investment guidelines and the fund manager is not
allowed to venture outside these limits. These operating boundaries are: having
an investment objective for the scheme, declaring the style of managing the portfolio
upfront, announcing the asset allocation of the portfolio right in the
beginning, the level of exposure to one stock or one sector, diversification,
continuous monitoring of the performance of the companies and having full time
research teams. Fund houses also have a risk management cell overlooking the
performance of the fund managers. Such high level of safety ensures that the
portfolio is not exposed to undue risks.
The fund houses have very
stringent guidelines on the personal investments by the employees. SEBI also
has certain regulations on this account. These put together ensure that the
investors’ money is safe. This clearly separates mutual funds from almost all
the investment options.
When we invest our money through
mutual funds, we are assigning the job of managing money to someone known as a
fund manager so that we can concentrate on our profession. The fund manager is
involved in managing money full time or in other words; it is the full time
profession of a fund manager to manage the investors’ money. If we think that
we are good at what we do because we are professionals, the same is applicable
to a fund manager also. Let us address an undue expectation that investors
normally have from the fund managers. Many of us feel that when we have given
our money to a fund manager, either the money must grow irrespective of the
market conditions or at the least, the portfolio should outperform the
benchmark index. Let us understand that while the fund manager and the team try
their level best to achieve outperformance over benchmark index, like any other
professional, they can only try and the result may not be in their hands. Many
passengers have experienced uncomfortable landing even when the pilot is
professionally trained, there are many flop movies given by the best of the
actors and directors, many a great batsmen have got out for low scores and many
patients have died on the operation table. The job of a fund manager is to
identify good companies and invest the money in line with the scheme objective.
There is always an attempt to outperform the benchmark index, but as we
mentioned earlier in case of many other professions, the result may not be in
their hands. However, this cannot be the reason for “Do-it-yourself” approach
to investment as a failed operation does not make us do the surgery ourselves.
Amit Trivedi
The author runs Karmayog Knowledge Academy.
The views expressed are his personal opinions.
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