How to Choose a Mutual Fund Manager?

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How to Choose a Mutual Fund Manager?

Instead of choosing a mutual fund manager, Investors often look for BEST MUTUAL FUND schemes available for investment.

All prominent investment and financial websites and YouTube channels suggest the best mutual fund scheme for investment.

I have always voiced my opinion that the choice should be the Right Mutual fund against the best mutual fund.

In this blog post, I would like to discuss whether it makes sense to chase FUND MANAGER rather than Best mutual fund schemes.

It is often said that  “DRIVER and not the car win race.”

I fully endorse that thought. In a mutual fund, the driver is the fund manager.

Since the portfolio returns are the outcome of stock selection and stock selection is done by FUND MANAGER, it makes more sense to choose MUTUAL FUND MANAGER rather than a mutual fund scheme.

The question to ask is, how investors would judge the fund manager?

On what parameters a mutual fund manager to be a judge?

In my opinion, on the following parameters, the fund manager should be evaluated.

Mutual Fund Manager

Returns of Mutual fund scheme managed

The returns that scheme generate can give a fair bit of idea about fund manager performance.

Absolute returns can be one yardstick where point to point return of a mutual fund scheme can be monitored. Looking at absolute performance can not give a clear idea about the mutual fund manager’s capability as there is no comparison.

Therefore, a more suitable yardstick would be Relative performance. The performance of the scheme can be judge against the benchmark or its peer group.

BENCHMARK is constructed by Stock exchanges, which is selected by the mutual fund companies for every scheme.

Comparing against the benchmark can give the relative performance of the scheme and inturn of Mutual fund manager.

If a comparison of relative returns indicates that a scheme earned a higher return than the benchmark, that would mean an outperformance by the fund manager. In the reverse case, the initial premise would be that the fund manager underperformed.

Risk-adjusted Returns

The returns are directly proportional to the risk. A fund manager who is taking higher risk should be able to generate additional returns than its peers.

To justify the higher risk the fund manager has to generate better return than peers.

.A fund manager who has made a lower return may be able to justify it through the lower risk taken. Such evaluations are conducted through Risk-adjusted Returns.

The risk-adjusted return generated by the fund manager can help in distinguishing from others.

The various measures that can be used to calculate risk-adjusted returns are listed below.

Sharpe Ratio

An investor can earn a risk-free return (Rf) by investing in government securities (G-Sec or T-Bill).

If an investor invests in a scheme, a risk is taken, and a return is earned (Rs).

Since the investor has taken a risk, the return generated by the scheme should be more than a risk-free return.

The difference between the two returns, i.e., Rs– Rf, is called a risk premium.

This risk premium is to be compared with the risk taken. Sharpe Ratio uses Standard Deviation as a measure of risk.

 It is calculated as:

Sharpe Ratio = (Rs minus Rf) ÷ Standard Deviation.

Sharpe Ratio is effectively the risk premium generated by assuming per unit of risk. Higher the Sharpe Ratio, better the scheme is considered to be.

We need to keep in mind that the value of the Sharpe ratio has to compared among the peer group. For example, we need to compare a large-cap mutual fund scheme with other large-cap scheme and not with Debt scheme.

Treynor Ratio

The computation of the risk premium is the same as was done for the Sharpe Ratio. However, for Risk, Treynor Ratio uses Beta.

Treynor Ratio is calculated as:

Treynor Ratio = (Rs minus Rf) ÷ Beta

Since the concept of Beta is more relevant for diversified equity schemes, Treynor Ratio comparisons should ideally be restricted to such schemes.

Alpha

The additional return generated by the scheme against its benchmark is defined as ALPHA.

A positive alpha is indicative of outperformance by the fund manager; negative alpha might indicate underperformance.

Conclusion

The risk-adjusted parameters may look too technical for retail investors to go into details.

The values of these parameters are readily available on the factsheet of the mutual fund companies.

One can also see the details of various research and ranking websites. These parameters give a fair bit idea of the fund managers.

Consistent value of various mutual fund scheme managed by the mutual fund manager argues well of the FUND MANAGER.

Do mindful of these facts and make an informed decision.

I love to hear from you.

This Post Has One Comment

  1. dizi izle

    I loved your blog article. Thanks Again. Really Great. Matelda Vittorio Hiltner

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