scorecardresearchWhy are portfolio managers chasing mutual funds?

Why are portfolio managers chasing mutual funds?

Updated: 30 Sep 2022, 09:45 AM IST
TL;DR.
  • Mutual funds are professionally managed by money managers who understand the market and invest accordingly to generate higher returns.
Mutual funds are low costs and offer tax benefits, making them a lucrative investment option for portfolio managers.

Mutual funds are low costs and offer tax benefits, making them a lucrative investment option for portfolio managers.

Whether a commoner or an investment professional, we all have individual investment goals and objectives. When it comes to investment, it is important to have a detailed understanding of the various financial instruments that align with our financial objectives.

One such financial instrument is equity, and there are many ways of investing in equities- direct investment in stocks, mutual funds (MF) or portfolio management service (PMS) and others.

A mutual fund is a financial instrument that pools assets from various investors to invest in stocks, short-term financial instruments, bonds, equities and other securities.

Mutual funds are professionally managed by money managers who understand the market and invest accordingly to generate higher returns.

Mutual funds are affordable and can be bought and sold easily in a short duration. Also, they offer tax benefits. These advantages of mutual funds make them an investment preference for PMS managers who are already investing in the market with a long-term vision.

Portfolio managers are investors too

PMS or portfolio managers are investment professionals who provide wealth management services with the help of a research team to manage investors' money in equity portfolios.

PMS manager helps investors with better control over portfolio composition as there are fewer investors. They also assist with profile customisation, as per the investors' risk profile and financial goals.

While professionally, they may be managing others' money under their PMS schemes, at the end of the day, they are also individuals with their own goals and objectives for investment.

Mutual funds are low costs and offer tax benefits, making them a lucrative investment option for portfolio managers.

Many PMS managers invest in mutual funds to diversify their investment portfolio as it provides the opportunity to invest in various assets such as gold, bonds, ETFs, etc.

Also, investors can choose mutual funds based on their ability to take market risks. Investment is necessary for every individual looking for a secured future amid dynamic market conditions and rising inflation prices.

Whether it is a CEO of a company or an MBA graduate or a portfolio manager, every individual is at an advantage to have a well-thought personal finance strategy.

Some advantages of investing in Mutual Funds by PMS managers can be summarised below:

Individual financial goals: While a PMS manager is professionally managing other investors' money, they are also individuals with their financial goals and objectives.

Also, these managers look up to the judgement of others in the industry and don't carry the burden of investor returns for their own PMS schemes. It is a strategy of diversification.

Know the market better: As professionals, PMS managers know the market better, which makes it easy for them to invest in mutual funds to get higher returns.

Lower cost: In recent times, PMS managers have invested in ETFs (exchange-traded funds) or passive funds. 

Many of the passive funds have been more consistent in their returns and are less volatile than actively managed equity funds. 

The biggest advantage is that the expense ratio of passive funds is a fraction of active equity funds, making them a low-cost investment option. 

While an active fund requires a fund manager and a team of analysts, a passive fund needs only one manager who replicates an index in the fund, making it cost-effective.

The end word

Portfolio managers have an advantage over retail investors in terms of understanding the market. They have been using this to manage their funds too. 

We have seen many of them invest in mutual funds for reasons like diversification of asset classes, meeting some financial goals, etc. Due to their consistent performance and low cost, passive funds have recently seen many portfolio managers investing in them.

(The author of this article is the Head of Research at Univest)

Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.

Article
What is NFO?
First Published: 30 Sep 2022, 09:45 AM IST