Ever since there have been mutual funds and fund managers, there has been a procedure used to select funds and managers. But, sincere thanks to the advent of the 401(k) in 1978, what was once a process exclusively for institutional consulting firms has become a complete stand-alone industry
The average investor can be weighed down by the variety of funds and, as a result, making a decision can be confusing. Companies like Morningstar and Lipper have services available to slice-and-dice funds and their managers into palatable pieces for investors of all levels to make well-versed decisions on whether to buy, sell or hold their funds. In this article, we'll take a few steps back and break down the important components of mutual funds and their managers that will help the average investor make very good decisions.
So who is the portfolio manager? Portfolio managers usually have similar academic credentials. Many have an undergraduate degree in business and some have chosen to follow up with graduate and doctoral degrees. They may also have various industry credentials, the standard of which is the Chartered Financial Analyst (CFA) designation.
The CFA is a progressive three-stage examination process that leads its candidates through all aspects of accounting, economics, securities analysis and portfolio management. While some managers have crossed over to the Certified Financial Planner (CFP) program, the CFA differs from the CFP. The CFP is a designation for those who work with individual investors. The program curriculum includes in-depth coverage of topics such as insurance and estate planning, which are not covered by the CFA program. Neither designation is required, but both are considered to be exceptional and respected.
The portfolio manager previously may have been a securities analyst whose role was to research and select securities to be purchased by portfolio managers. While some companies separate those roles, a portfolio manager may have dual roles acting as the portfolio manager and analyst. While there is no official requirement for experience, the portfolio manager usually has at least five years of industry experience.
In "The Wizard of Oz", the wizard remained unknown behind a curtain and few were allowed to see him. In the world of mutual funds, people hardly ever get to peek behind the curtain to see how everything works behind the scenes. The main responsibility of the portfolio manager are to decide on securities to purchase, determine which ones to sell, and rebalance the portfolio in conjunction with the fund's buying, selling, contributions and redemption activity. Selecting securities to buy and sell can be in conjunction with the analyst's recommendation and determined either independently or along with the help of an investment committee. Depending on the composition and size of the fund, the portfolio manager may be part of a team managing the fund or may be the sole portfolio manager.
Portfolio managers' jobs carry an intense burden; they tend to be heralded when the fund performs well and attacked when the fund performs poorly. The portfolio manager is often called on to provide interpretation to the fund's investors, discussing the economy, the economic outlook, the fund itself or even politics. On the other hand, fund managers are not allowed to reveal the actual holdings of the fund as there are specific rules regarding when that information can be released.
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