http://www.moneyspidery.com/2012/02/07/how-to-deal-with-changes-in-fund-attributes/
The
performance of a mutual fund depends on certain fundamental attributes,
such as the quality of fund management, experience and qualification of
fund manager, investment style and fund size. A change in these can
impact the future performance of the fund, which, in turn, can alter the
returns earned by an investor. Here are some changes that you should
watch out for.
Fund merger: The asset management companies (AMCs)
of mutual funds can merge to form a single entity. However, these are
subject to Sebi approval and must conform to the regulations. Typically,
mergers are viewed as beneficial for the AMCs involved as it tends to
improve the overall efficiency through enhanced skills, lower costs and
reduced competition. Investors must consider how their rights will be
affected because of such mergers.
Fund manager: Good fund managers usually work with a long-term perspective and believe in consistency. So, replacing the fund manager of an actively managed fund can affect its performance, though the impact is not too strong in case of a passively managed fund. Investors must consider the past performance of the new manager as well as his transaction cost history because high cost implies excessive trading by him.
Investment style: Changing the type of securities in which the fund invests, be it large-, mid- or small-caps, dividend yield stocks, value stocks, or sector-specific stocks, affects its risk profile. Investors must evaluate the fund portfolio, which is provided monthly, to ensure that the fund has the same type of assets as stated in its offer document. So, if a large-cap fund holds a majority of mid-cap stocks, its NAV will exhibit instability as the latter are more volatile compared with large-cap securities.
Assets under management (AUM): A fund with large assets can benefit from the economy of scale and lower expense ratio. However, some fund managers are comfortable managing a mid-sized fund and an increase in the AUM can adversely affect its performance. This is because rising assets become unmanageable after a point, which leads to inefficiencies. The fund can also grow in size instantly because of mergers. Investors must ensure that their investment value does not suffer due to non-optimal fund size.
Fund statistics: The performance of a fund with respect to its benchmark can be judged by looking at its beta and value of r-square. These statistics are calculated on a quarterly, semi-annually or yearly basis and shouldn’t vary much over time. A falling beta and r-square implies that the fund is not tracking its benchmark, whereas a fund with a consistent beta value of 1 (and high r square) implies that the fund is closely tracking its benchmark index. These statistics are readily available on mutual fund tracking websites such as valueresearch.com.
The changes in fundamental attributes can be tracked through the periodic financial reports of fund houses. If these appear to be detrimental to the fund, investors should consider switching or exiting the scheme.
The
performance of a mutual fund depends on certain fundamental attributes,
such as the quality of fund management, experience and qualification of
fund manager, investment style and fund size. A change in these can
impact the future performance of the fund, which, in turn, can alter the
returns earned by an investor. Here are some changes that you should
watch out for.Fund manager: Good fund managers usually work with a long-term perspective and believe in consistency. So, replacing the fund manager of an actively managed fund can affect its performance, though the impact is not too strong in case of a passively managed fund. Investors must consider the past performance of the new manager as well as his transaction cost history because high cost implies excessive trading by him.
Investment style: Changing the type of securities in which the fund invests, be it large-, mid- or small-caps, dividend yield stocks, value stocks, or sector-specific stocks, affects its risk profile. Investors must evaluate the fund portfolio, which is provided monthly, to ensure that the fund has the same type of assets as stated in its offer document. So, if a large-cap fund holds a majority of mid-cap stocks, its NAV will exhibit instability as the latter are more volatile compared with large-cap securities.
Assets under management (AUM): A fund with large assets can benefit from the economy of scale and lower expense ratio. However, some fund managers are comfortable managing a mid-sized fund and an increase in the AUM can adversely affect its performance. This is because rising assets become unmanageable after a point, which leads to inefficiencies. The fund can also grow in size instantly because of mergers. Investors must ensure that their investment value does not suffer due to non-optimal fund size.
Fund statistics: The performance of a fund with respect to its benchmark can be judged by looking at its beta and value of r-square. These statistics are calculated on a quarterly, semi-annually or yearly basis and shouldn’t vary much over time. A falling beta and r-square implies that the fund is not tracking its benchmark, whereas a fund with a consistent beta value of 1 (and high r square) implies that the fund is closely tracking its benchmark index. These statistics are readily available on mutual fund tracking websites such as valueresearch.com.
The changes in fundamental attributes can be tracked through the periodic financial reports of fund houses. If these appear to be detrimental to the fund, investors should consider switching or exiting the scheme.
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