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Mutual funds – from hold to bold

Aug 22, 2000

Volatility is a bad thing for the fund manager right? Wrong! Smart fund managers are making hay while the sun shines. So in times of volatility, some fund managers have made a rather bold departure from their strategy of buy/hold to buy/sell.

Mutual funds are for the serious investor, which is why punters will have nothing to do with it. Fund managers make their investments with a lot of focus and generally adopt a strategy to hold the stock till it continues to give reasonable returns. Few fund managers buy and sell stocks aggressively (which adds to portfolio turnover and transaction costs) and prefer to adopt a buy and hold strategy.

However, few fund managers are willing to let go off the opportunities thrown up by the current market volatility. They see this as an opportunity to enhance returns to investors. They believe that a buy/hold strategy works fine in a bull market, but it won’t work in a sideways market (read volatile) for a major portion of the portfolio. This helps the fund to give the investor above-average returns if the markets return to volatility a year later, whereas the investor would have gained nothing had the fund simply bought and hold.

So is this a good thing for the investor? That’s depends a lot on the investor’s expectations from the fund manager. Some investors expect the fund manager to give exceptional returns come winter, summer, monsoon (again read market volatility). That’s not always possible for the fund manager, which makes him exploit market conditions to churn out decent returns.

On the other hand, if there is a serious mutual fund investor who is not necessarily looking for 100% growth every month, moves by the fund manager to exploit market volatility is not a good thing. Such investors must ensure that their fund manager’s investment style differs from that of others.

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