Beginner's Guide on What Is Fund Management, and It's Importance

Management of funds refers to the process of dealing with an institution's or an individual's fund inflow and outflow. It is a crucial aspect of financial management, and it aims to maximise profits from any investment. So, what is the importance of it in mutual funds or why does it need a fund manager? Read on to find out more details on the same.

Getting started with Fund Management

When you invest your funds in a mutual fund, a professional manager invests this pool of funds into various securities, debts, and related instruments as per set goals of the fund to reach the desired goal for the investor.

What is Fund Management?

Fund management is the act of taking the collected pool of funds and taking the necessary decisions regarding the same. The decisions are usually related to investing in new securities and selling off securities that are depreciating. This requires:

  • Exhaustive knowledge of the market and the current trends in financial affairs

  • A clear understanding of fund flows (both inflow and outflow).

  • Capability to analyse complex financial information and draw statistical conclusions.

A Fund Manager is a professional with appropriate qualifications that must have the above capabilities. Fund managers are entrusted with the funds of a mutual fund and help with the growth of the capital while making sure they remain safe from risks of losing the capital amount.

Importance of Fund Management

  • Diversification

    Diversification is a key aspect of managing mutual funds. It is the process of allocating funds across asset class to make it as risk-free as possible while maintaining the desired return potential. Based on the expectations of investors, there is a distribution of funds in assets and securities that match the risk tolerance of investors.

  • Asset Allocation:

    Management of funds ensures proper asset allocation (or in other words, proper allocation of funds in varied assets and securities) to match the short term as well as long term goals of the fund. Asset allocation is closely related to diversification. While diversification focuses on reducing the risk involved in investments, asset allocation focuses on maximising the benefits earned from the investments.

  • Confirming to the Regulatory Guidelines

    The Securities and Exchange Board of India (SEBI) is the regulatory body that governs the mutual fund industry. A fund manager ensures the investment decisions are within the regulatory guidelines. Non-compliance of instructions can lead to hefty penalties for the fund house, which can impact the investors.

  • Performance Tracking

    Fund managers are responsible for tracking of a fund's performance and ensuring the investment strategies are adjusted to meet the goals the fund intends to achieve. They use various metrics to analyse a fund's performance carefully.

  • Emotion-Free Investing

    Fund managers keep emotions out while making investment decisions. These decisions, rather than being governed by sentiments, are backed by careful analysation of data that helps them understand the best value of security they invest in. This helps them decrease or increase the weightage of security without attaching sentiments and emotions into it.

  • Strategy Based Investing

    There are various styles of fund management that these professionals adhere to while making investment-related decisions. For instance, a fund manager may choose top-down investing where they look for best investment opportunities based on how good or bad the economy is performing. Or they could use a technical analysis strategy where past trading patterns of a stock govern the investment decision. This strategy-based investing ensures that the fund remains true to its goal for the investors.

Choosing a Reliable Fund Manager

Fund Management is a complex process involving a lot of financial knowledge and research. This is why you should choose a reliable and experienced fund manager while selecting a mutual fund. Some factor to look into while looking at a fund manager are:

  • Experience in the industry

  • Rankings of the managers by credible bodies

  • Past track-records of the funds they are actively managing

You should perform a thorough background check on the fund manager and mainly check their track record, before selecting a mutual fund. Also, make sure you're are very clear on the terms and conditions of the investments and the risks involved with the same.