In the past many of you investors may have experienced your mutual fund distributor / agent / relationship manager trying to persuade you to invest in a mutual fund schemes, merely because the respective mutual fund scheme is managed by a star fund manager. The punch line you must have heard is — Sir, invest in XYZ equity mutual fund. It is managed by Mr Abc — a star fund manager, and thus is bound to give solid returns. Probably, knowing the fund manager well (due to frequent interaction with the star fund managers at fund management meetings organized for mutual fund distributors / agents), he (your mutual fund distributor / agent / relationship manager) may have also tried to provide you his history and biography, in attempt to impress upon you and try to gain confidence.

And while many of you may have acted upon this luring talk, the question arises whether this a prudent way of investing in mutual funds? Should there be so much emphasis on individualistic fund management.

We are quite sure that many of you under sheer influence of your mutual fund distributor / agent / relationship manager, may concur on the aforementioned view, but then you also need to ask for a track record of performance of all the mutual fund schemes managed by the star fund manager (which your mutual fund distributor / agent / relationship manager has high regards) where you need to check the following:

• Returns of the respective mutual fund schemes
• Risk investors are exposed to (as revealed by the Standard Deviation)
• Risk- adjusted returns achieved by the fund (as revealed by the Sharpe Ratio)
• Portfolio churning (as revealed by the Portfolio Turnover Ratio)

Moreover, as a litmus test you also need to ascertain how the respective mutual fund schemes managed by the star fund manager has sailed during various market cycles (i.e. during bull and bear phases). Mind you, while your mutual fund distributor / agent / relationship manager may have everything to boast about the star fund manager during the bull phases, the true test of the fund manager (he’s promoting) lies during the bear phase. This because the respective mutual fund schemes managed by the star fund manager must display limited downside risk during the turbulence of the equity markets, thereby attempting to protect wealth erosion.

After having done an assessment of the aforementioned points, if indeed the star fund manager has been successful on the above criteria; you need to seriously think what’s going to happen to the respective mutual fund schemes managed by him (the star fund manager) when he leaves the organization (for better career prospects, or even when he retires). While this may sound a bit too much of long- term thinking, in our opinion it is imperative if the mutual fund house is not process and systems driven, whereby the fund manager has been given the leeway to manage a mutual fund scheme based on his individual fund management traits. Thus going forward all the starry returns which you vied for (in the past) may not be delivered in the future as the star fund manager quits or retires.

Hence given such a scenario the big question may now pop up — what do I do?

Well, in our opinion instead of relying heavily on an individual’s fund management trait, it is vital that you give due weightage to the investment processes and systems followed by the fund house. This in turn will help you to reduce the downside risk as investments made (for the portfolio) are process driven, whereby the investment mandates too are followed by the fund houses and the fund manager’s role is to function within the parameters defined by the fund house.

It is noteworthy that well laid out investment processes and systems, have a major impact of individual mutual fund schemes perform, and moreover tend to sail well during the turbulence of the equity markets and also when the fund manager quits or retires from his job (this is because everything is defined as per the set investment processes and systems, along with the mandate which the respective funds follow).

Thus, getting the fund house which follows strong investment processes and systems, is the first, right and very important step in making a prudent investment decision in mutual fund investing.

We recognise that today with 43 mutual fund houses in existence the task can be daunting, but to provide a perspective herein below are some points which you need to evaluate while selecting a right fund house and strong process & systems driven fund house:

• Fund management experience: You should always prefer a fund house with vast experience in managing investors’ hard earned money, over one which is relatively new. The fund house’s vast experience helps in assessing its ability to tide over even during the turbulence of the equity markets, thus proving it to be a resilience test.