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What kind of research is carried out by a mutual fund?

By Finserv MARKETS - Oct 15,2019
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What kind of research is carried out by a mutual fund

Zoya is a mutual fund manager at a reputed fund house in Mumbai. She feels that the interest rates are likely to come down in the near future and expects the automobile and real estate sectors to benefit hugely from this lowering of interest rates. So, she decided to commit 15% of the funds available to each of these sectors. After this sectoral selection, she then picked three companies in each of these sectors and analysed the fundamentals and relative merits/valuations of each of these individual companies. As expected, the demand in these sectors picked up with lower interest rates, that naturally led to a rise in the stock value of the chosen companies, with benefits reaped by fund houses and their investors alike.

Have you ever thought about how your mutual fund investments grow year after year even without your review? It’s made possible by a whole team working behind the scenes to manage your mutual fund portfolio and deliver to you the best performance results on your investment. This is known as the mutual fund management team usually overseen by fund managers. Mutual fund managers use varied techniques to multiply their investors’ money, that investors themselves might be unaware of. They work within the broad rules and regulations laid down by the fund houses and mandate of schemes they manage, in line with investor’s interests. These have a considerable impact on returns than one could imagine. The research done by the fund houses and their fund management teams within the purview of these rules and processes can be segregated into two major aspects:

Stock Picking Approaches

Picking stocks is never an arbitrary or instinctive process, but is a methodical approach in a bid to maximize returns on investments by carrying out research on the available investment prospects in the market. Fund houses largely follow either of the two types or a combination of these popular stock-picking approaches – top-down and bottom-up.

In the top-down approach, the fund managers first at the global and domestic macroeconomic fundamentals, and other factors such as political climate, government policies, and general global trends. Once the macro-level analysis is done, the fund managers specifically analyse several industry sectors within the economy and zeroes in on specific sectors that encourage growth under the given economic conditions. So, the underlying assumption of the approach is this, if the economy is sound, then the company stocks also perform well.

While the essence of top down approach of stock picking is about analyzing the economy first, followed by industry and lastly the company, the bottom up approach is completely its reverse. Here, the fund manager moves from company towards economic forecasts via the industry. The prime focus here are the company’s fundamentals and its ability to perform under diverse economic conditions and build upon growth prospects. Once the company is zeroed in, the fund manager does a simulation analysis to gauge the impact of different economic conditions such as tax rate changes, interest rate changes, etc. So, the bottom approach tends to select companies with a robust growth potential regardless of the sector to which it belongs. The merit of individual stock and its growth prospects are two key criteria for a fund manager to pick a company stock with this approach.

Team Effort

Each fund house has an investment panel comprising of the chief investment officer, fund managers, and research analysts. This panel is responsible for reviewing the performance of schemes and market outlook and preparing an overall investment strategy as discussed above. The panel examines all the investment proposals that mention the management’s background, business outlook, financial analysis or valuation, and the reasons for recommendations. A team of researchers and analysts or the fund management team helps the fund manager to prepare a list of stocks that meet the fund house’s requirements within the scheme’s mandate. The team also keeps an eye out for stocks that can be a good investment and tracks companies in which the fund already invested.

Conclusion

Given the meticulous research involved and systematic approaches of stock picking followed by the fund houses, investing in mutual funds is a promising way to grow your money with higher returns. Most investors either do not have the knack, time or knowledge to conduct thorough research before investing in mutual funds. With online platforms such as Finserv MARKETS, investing in mutual funds online has never been this simpler since it solves the investor’s dilemma of best mutual funds to invest in.

On Finserv MARKETS, the professional fund managers perform all the administrative work as well as choose top-rated mutual funds to suit the investor’s goals. On Finserv MARKETS, you can also diversify your allocation of top-rated mutual funds by investing in a basket of securities and cater to your long-term financial goals. Other features of top-rated mutual fund investments include easy withdrawal facility and a tax deduction of up to Rs. 1,50,000 as per Section 80C of the Income Tax Act 1961 for ELSS.

Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs.  We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other  benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!

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