Last time, we discussed about diversification - one of the major benefits offered by mutual funds. This time, we will discuss another great benefit of investing through mutual funds - professional management of one's money.

As we saw in the first article in the series, 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. As we saw in the earlier article, the fund manager spends most of the time in this business. 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. Many 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 also 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. SEBI has also issued a code of conduct for those involved in the sales and distribution of mutual funds. This code defines what a person can say and what one cannot. For example, a mutual fund sales person cannot guarantee returns. While talking about past performance, one must highlight the fact that the past performance does not indicate anything about the future performance of the scheme. One has to also mention the risks involved. Going back to the first article in the series, we had mentioned that there are two major sources of income - profession and investment - and highlighted some differences between the two.

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 out performance 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 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, 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

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