How do Fund Managers actually make decisions?

Fund managers play a crucial role in managing mutual funds and other investment portfolios, making critical decisions that directly impact investors’ returns. Their decision-making process is a combination of underlying research, strategic planning, risk management, and continuous monitoring. Understanding how fund managers make decisions offers valuable insights into the financial markets and the art of investment management.

Every investment decision a fund manager makes begins with thorough research and analysis. This involves studying multiple data sources, including economic trends, industry reports, company financials, and geopolitical developments. 

Fund managers rely on a team of research analysts who provide data-backed insights, including global macroeconomic trends and detailed evaluations of individual companies. 

For example, before investing in a technology firm, a fund manager will assess its past performance, growth potential, leadership quality, competitive positioning, and sector sentiment.

This research is not limited to equities; it also includes bonds, commodities, and other asset classes. Fundamental analysis is key, as managers evaluate a company’s financial health, earnings prospects, and valuation metrics, such as price-to-earnings or price-to-book ratios. For bond funds, credit quality and interest rate sensitivity are crucial factors.

Fund managers operate within a clearly defined investment philosophy that aligns with the fund’s objectives and risk tolerance. 

This philosophy could be growth-oriented, value-based, income-focused, or thematic (such as ESG or sector-specific funds). 

The chosen strategy guides the selection of assets and when to buy or sell them. For example, active fund managers seek to outperform benchmarks by making strategic calls, whereas passive managers aim to replicate market indices with minimal intervention.

The investment strategy formulation is dynamic, adapting to changing market conditions. Managers utilise quantitative models, such as the Capital Asset Pricing Model (CAPM) or Arbitrage Pricing Theory (APT), to evaluate expected returns in relation to risk. This helps in identifying undervalued or overvalued securities.

Once potential investments are identified, fund managers construct a diversified portfolio designed to meet the fund’s goals while balancing risk. Diversification involves spreading investments across different asset classes, sectors, and geographic regions to reduce dependency on any single investment’s performance. This approach mitigates risks and smooths out volatility.

The portfolio mix is carefully put together – equities, bonds, gold, real estate, or alternative assets are combined in proportions that align with the fund’s risk appetite and return expectations. 

For instance, institutional funds may allocate capital to alternative investments like private equity or hedge funds to enhance returns and reduce the correlation (or dependency) with traditional markets.

Adequate risk management is what each fund manager strives for in decision-making. Managers continuously assess and mitigate risks that could impact portfolio performance. 

They utilise tools such as Value at Risk (VaR), stress testing, and scenario analysis to understand potential losses under adverse market conditions. 

This proactive approach allows them to adjust positions before risks materialise.

Emotional intelligence also plays a role here. Fund managers must guard against cognitive biases such as confirmation bias, which can lead to over-concentration in favoured sectors, or emotional reactions like panic selling during downturns. 

Maintaining discipline, calm, and a long-term vision is essential to avoid impulsive decisions driven by fear or greed.

Markets are dynamic, and so are the investment strategies of fund managers. Continuous monitoring of portfolio performance against benchmarks is essential. 

If specific sectors underperform or new opportunities arise, fund managers rebalance the portfolio by increasing exposure to promising assets or reducing holdings in those lagging. This active management helps maintain alignment with the fund’s objectives and the client’s risk profile, adapting to evolving economic and market scenarios.

Fund managers must also ensure that their investment decisions comply with the regulatory guidelines set by authorities such as SEBI. This includes adhering to reporting standards, risk limits, and investor disclosure requirements. Additionally, fund managers often delegate operational tasks such as investment gathering, reporting, and broker interactions to specialised teams, allowing them to focus on market analysis and strategy.

For investors, understanding a fund manager’s decision-making process also means evaluating their expertise. Key considerations include the manager’s investment philosophy, past performance relative to benchmarks, experience in managing similar funds, and the fund’s expense ratio. 

A manager whose style aligns with an investor’s goals and risk tolerance is more likely to deliver satisfactory outcomes.

In summary, fund managers make investment decisions through a meticulous process that involves extensive research, a strategic investment philosophy, portfolio diversification, risk management, and ongoing portfolio monitoring. 

They balance quantitative analysis with qualitative judgment (providing a human touch to investment decisions), all while navigating market complexities and investor expectations. This disciplined approach maximises returns while managing risks, ultimately safeguarding and growing investors’ wealth in an ever-changing financial landscape. 

Understanding this process enables investors to appreciate the expertise behind their mutual fund investments and make more informed choices.

What if we told you that a single tech-enabled platform can make your life easier as a fund manager?

With Rabbit’s powerful tools and all-in-one platform, financial managers and MFDs can seamlessly execute the following:

• Lead management and client onboarding
• One-click integrated KYC process.
• Single platform for mutual fund portfolio management
• Analyse concentration risks and fund performance
• Share portfolio reports and updates smartly.
• Offer goal-based investment plans

Schedule a demo to have a one-on-one consultation with our expert team. 

1. What is the difference between a mutual fund distributor and an investment app? 

A mutual fund distributor offers personalized advice, emotional support, and tailored planning. An investment app offers convenience, speed, and self-directed investing, but may lack context.

2. Can robo-advisors replace human financial advisors? 

Not entirely. Robo-advisors work well for basic needs, but human advisors bring emotional intelligence and adaptability, especially in complex life scenarios.

3. Why is emotional intelligence critical in financial advising? 

It helps advisors understand clients’ emotions, life goals, and fears, leading to more holistic, trustworthy advice.

4. Are investment apps suitable for all types of investors? 

They suit tech-savvy investors with simple goals. Those with complex needs, emotional triggers, or evolving situations benefit more from human advisors.

5. How can investors choose between a human advisor and an investment app? 

Assess your financial complexity and comfort with technology. Try an app for simplicity and cost. Choose a human advisor for trust and guidance. Nowadays, you don’t have to choose with B2B2C apps like Rabbit Invest that onboard mutual fund distributors to simplify investing for the next generation of investors.