To achieve higher returns, a fund manager actively manages funds and tries to beat the benchmark index, whereas for an investor, a benchmark index gives an idea to evaluate his fund’s performance.
The active management of a fund basically means that a fund manager has taken an opportunity of buying and selling of securities to outperform their fund in a hedging condition. However, the active management of funds totally depends on the skill of the fund manager, his research, analysis and the knowledge of the overall financial market condition. Properly managing of funds also minimises the risk factor which is directly linked with market’s volatility. Therefore, one must know one’s fund manager who actually manages the fund of investors.
“We believe actively managed mutual funds in India will continue to deliver more than markets. There are a number of factors driving this view. Firstly, the Indian stock market has had strong returns over the past 7 years, with the IISL Nifty 50 PR Index returning 8.08% per annum over this time, but the Morningstar category average for India Fund Large Caps has returned 10.15% after fees. So, large-cap Indian equity managers continue to outperform the market,” says Christopher Douglas, Director – Manager Research Ratings, Asia-Pacific, Morningstar.
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The dispersion of manager returns does tend to fall when you have had such impressive and prolonged returns like we have seen in India over the past 10 years, which could be one factor behind the perceived fall in alpha generation. Also, we know that foreign investors have been attracted to the Indian market in recent years. These investors tend to focus on a narrow group of companies and often leave abruptly, which creates opportunities for smart active managers to buy these companies back at a discount.
Why one should invest in mutual funds
The mutual fund industry is growing at a fact pace and to earn better returns it is the right time to invest your money in mutual funds. In simple words, when the market grows there is a lot of scope to earn better returns. Recently, the average asset under management (AUM) of the Indian mutual fund industry has also crossed Rs 18 lakh crore. So, there is an opportunity for those investors who can invest and try to remain invested in the market for a longer term. Only then they might get the benefit of growing MF industry by getting higher returns on their portfolios.
“We are yet to see wide-spread investor adoption of Indian mutual funds, which currently accounts for only 4.5% of the overall Indian market, whereas US mutual fund investors make up around 35% of the US market. We would expect capable active managers to be able to have an advantage over others due to their knowledge, experience and on-the-ground insights. That being said, there is pressure on active managers to demonstrate their worth in the local market,” says Douglas.
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However, the above factors are not necessarily permanent. As markets mature, and the incorporation of information becomes more efficient, then the amount of fees that a manager charges will have an impact on their ability to outperform. Similarly, lots of factors play an important role in the performance and growth of funds.
“We expect to see downward pressure on fees in India as the industry grows and they can pass on the benefits of scale to investors. All else being equal, this can only improve a fund manager’s ability to out-perform,” adds Douglas.