One of the most crucial aspects of investing in mutual funds is the management of the portfolio, which includes stocks, bonds, and other asset classes. Whether managed actively or passively, the fund manager plays a significant role in determining the fund's performance and, consequently, the investor's portfolio over time.
The Role of a Fund Manager
When investors choose to invest in a mutual fund, they are essentially entrusting the building and management of a securities portfolio to a fund manager. Based on thorough research and analysis, fund managers make critical decisions about buying and selling assets. Portfolios can be managed in two distinct ways: passively or actively.
In a passively managed portfolio, the selection of assets is based on an established index, mirroring its composition. In contrast, an actively managed portfolio relies on the fund manager's expertise to select and manage its components. This hands-on approach makes the role of the fund manager crucial for the performance of actively managed mutual funds.
Duties of a Fund Manager
Meeting Reporting Requirements:
Fund managers must design funds that adhere to regulatory reporting standards. This involves considering investor objectives, strategies, risks, expenses, and various policies. Ensuring that investors are informed and comply with these details is a key responsibility. Fund managers must also ensure that all necessary documents are timely furnished and comply with laws and regulations.
Compliance with Regulatory Authorities:
Mutual funds operate under strict regulations set by governing bodies like the Securities and Exchange Board of India (SEBI) and other relevant authorities. These regulations cover all aspects, from signing clients to handling redemptions. Fund managers are accountable to both legislators and investors for any non-compliance.
Wealth Protection:
Protecting investors' wealth is a fundamental duty of fund managers. While generating returns involves taking some risks, these must not be reckless. Decisions regarding the buying or selling of assets are based on extensive research and due diligence. Fund managers may conduct company investigations and employ risk management techniques to evaluate investments. Diversification of asset portfolios is a key strategy to mitigate risk.
Monitoring Fund Performance:
Fund managers decide where to invest, guided by regulations, investor expectations, and objectives. They are evaluated based on their funds' performance and their ability to deliver growth that surpasses interest rates and inflation, justifying the risks taken.
Oversight and Hiring:
Managing funds involves extensive responsibilities, prompting fund managers to seek assistance from various professionals and firms. Specific duties such as issuing annual reports, raising capital, and negotiating with brokers are often outsourced. While some regulatory responsibilities can be delegated, the ultimate accountability for fund performance rests solely with the fund manager.
The impact of a fund manager on a mutual fund's success underscores the importance of their role in the investment landscape. Their expertise and decisions can significantly influence the returns and stability of investors' portfolios, highlighting the critical nature of their responsibilities.