What’s fund management all about, some of you may say. Others may wonder who is a fund manager. For starters, let’s try to define what fund management actually is. Fund management usually refers to appropriate allocation of investors’ money. The aim here is to invest the funds in assets or securities that can bring good returns for their investors. It involves looking out for all the suitable investment opportunities which can generate sizable profits for investors. The return on investment (ROI) is a very crucial factor in determining the prospects of an investment. So, one who is a fund manager mostly deals with maximising ROI and reducing the risks as much as possible. A fund management company, who is a fund manager shall seek to achieve these objectives.
Active Fund Management
A person or financial firm, who is a fund manager acquires sophisticated skills to effectively manage funds. Financial services institutions like IIFL Securities employ professionals who are experts in managing funds in the commodity exchanges. Two types of fund management methods exist. First is active management and the second includes passive management. Active fund management follows a strategy which does not depend on performance of weighted indexes. It usually requires constant buying and selling of various securities. One who is a fund manager, relies mainly on analysis and research, price predictions made on certain specific calculations. Based on the results he makes buying and selling decisions.
Principle of Active Fund Management
Those who reject the efficient markets hypothesis choose active management. They share the opinion that some market inefficiencies allow for inaccurate market pricing. As a result, finding mispriced stocks and using a plan to profit from the price correction are two ways to make money in the stock market. Such an investing strategy can entail either buying inexpensive assets or selling overpriced stocks short. They further utilise active management to alter risk and provide lower volatility than the benchmark. The goal of active management is to outperform a benchmark, often some kind of market index.
Active Management Techniques
Active managers think that tactics that look for stocks trading at a lesser price than their justified worth will lead to financial success on the stock market. To choose stocks, they may use a variety of fundamental, quantitative, and technical indicators in their study. They could also use asset allocation techniques that support the objectives of their fund. Many investment firms and fund sponsors engage qualified investment managers like IIFL Securities, to oversee their mutual funds because they think it is feasible to outperform the market. They may view this as a method to adapt to the markets’ extraordinary developments and constantly shifting market conditions.
Process of Active Management
There are three phases are in the active management process:
The planning phase involves determining the investor’s goals and limitations. Expectations for risk and return, liquidity demands, time horizon, tax considerations, plus legal constraints are just a few examples. Fund managers form an investment policy statement (IPS) from these goals and restrictions. The IPS often specifies the reporting needs, rebalancing recommendations, investment communication, management costs, and investment strategy and approach. The active managers then need to predict risk-and-return of assets that will serve as the foundation of the portfolio. Last but not least, asset class weights should be used to define the strategic asset allocation.
The portfolio’s implementation, along with its development and updating, is part of the execution process. When choosing specific assets for the total portfolio, active managers blend existing trading strategies with expectations from the capital markets. Active managers optimise the portfolio in this way by effectively integrating assets to meet specific risk and return goals.
In the feedback phase, managers mitigate exposures to investments. To make sure the portfolio remains within the IPS’s mandate, they rebalance portfolios. Investors also routinely assess the performance of the portfolio to reach investment goals.
Positive aspects of active management
Active management’s main selling point is that it lets investors choose from a number of assets rather than betting on the entire market. Investors may adopt this tactic for a number of reasons, including the following:
They can disagree with the efficient-market theory or think that some market sectors are less effective than others at generating profits.
Even if it means settling for somewhat lower returns, they might prefer to limit volatility by putting their money into high-quality, low-risk firms as opposed to the entire market.
On the other hand, some investors might be willing to accept more risk in search of the chance to earn returns that are higher than the market average.
Investment not closely tied to the market might help diversify a portfolio and perhaps lower volatility.
An actively managed fund may be more appropriate for certain investors if they choose to use strategies which sidesteps particular industries.