Should fund manager's own investment be criteria for potential investors?

Fund manager's investments in their own schemes is a good metric to look at, but it isn't the most important

When ace fund managers such as, Prashant Jain of HDFC Mutual Fund and S Naren, of ICICI Prudential Mutual Fund, invest significant amounts of their personal wealth in their own fund houses or schemes managed by them, should investors find more comfort in the fund house or scheme? 

Most market experts feel that it is an additional factor that one can look at because it shows the level of commitment that the fund manager has as far as his own fund house or scheme goes.  

But can it be a deciding factor? The answer is a resounding no. Hemant Rustagi, CEO, WiseInvest Advisors says: “One cannot take the call of investing in a fund house or scheme on this basis of this single metric. There will be many more important factors. There could be circumstances where the asset class or risk profile of the scheme may not suit the investor.”

For example: A fund manager may have invested in his own infrastructure fund. But it is not ideally suited for invested who don’t have the gumption to handle the volatility in these schemes. Similarly, there can be many sector or hybrid funds whose risk profile may not suit the investor. 

Another thing that needs to be considered while investing is that whether it is a suitable scheme, in terms of the mandate. Many investors look at mutual funds, especially balanced funds, to make money on a regularly basis. Such investors cannot be looking at schemes which are closed-end in nature because it deprives them of liquidity. “In such circumstances, investors need to look at a number of other factors,” says a fund manager.  

Given that mutual funds are subject to market risk, investors should concentrate on a few key factors: The mandate of the scheme, suitability with your risk profile and performance over a long term (ideally over one bull and bear run) and costs to some extent. The latter matters because higher costs reduces returns.  

At the end of the day, as Vikaas Sachdeva, CEO of Edelweiss Asset Management says, performance should be the main criteria. Considering too many factors can lead to more confusion.