Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Should You Worry About How Much Your Fund Manager Earns? - Outside View by PersonalFN
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Should You Worry About How Much Your Fund Manager Earns?
Sep 19, 2016

After doing much research, Vipul decided to invest in Fund A. His criteria for shortlisting the fund was based on the fund manager with a lower pay package. He thought his friend Raj, a professional independent investment advisor will be very happy with his choice of fund. But Raj erased Vipul's misconceptions by explaining the parameters that go in to prudent mutual fund scheme selection.

In the pursuit of creating more transparency the Securities Exchange Board of India (SEBI) made it mandatory for all the Asset Management Companies (AMCs) to disclose a list of employees earning a package of Rs 60 lakh (i.e. Rs 5 lakh per month or more) or more. Such demand from the regulator created a hullabaloo over salaries paid to fund managers and other functional heads at fund houses.

Thomas Jefferson rightly said, "Most bad government results from too much government".

Since a fund manager is managing your money, knowing his experience in fund management is valuable. The fortune of the fund will be closely linked to the prudence with which he/she manages; and mind you, this is a function of the experience he/she carries in the field of fund management and equity research. One also needs to take a look at the research team that supports him.

Assessing fund manager's performance and/or salary to select a mutual fund is not a prudent way.

Here's what you should do to select the right funds...

  • Compare funds for their performance track records under different market conditions and time periods;
  • Evaluate the risk-return trade-off;
  • Portfolio characteristics - top 10 stocks held, top-5 sectors the fund is having exposure to, how concentrated is the fund's portfolio, how often the portfolio is churned, the proportion of Assets Under Management (AUM) actually performing;
  • Check the expense ratios;
  • Average AUM; and
  • Recognise the risk management and investment processes followed at the fund house;

Besides this, understand your risk appetite, investment time horizon, and your financial goals to pick mutual funds prudently that match your needs.

Indeed, like any other cost, the fund manager's salary also has a bearing. But there's no point giving too much importance, because ultimately it's a component of the total expense ratio of the fund. Moreover, SEBI has installed strict limits in terms of what can be the maximum expenses ratio that can be charged on the basis of the type and size of the fund.

Also, here's an interesting finding...

As reported by the Hindu Business Line, dated August 14, 2016, in reality, the fund manager's salary as a component of overall expense of running a fund is minuscule. The ratio of executive compensation to AUM ranges between 0.00021 and 0.00039 times for the top six fund houses (HDFC, ICICI Prudential, Reliance, Birla Sun Life, SBI, and UTI - whose assets under management exceed Rs 1 lakh crore as of March 2016). This, in comparison to the overall expenses, holds little value.

The verdict:

In a knowledge-driven business, where specialized skills of professionals weigh high, comparing salaries alone don't reveal much. In fact, unless you are a shareholder, the cost structure of the AMCs shouldn't bother you as a mutual fund investor; for whom the expense ratio would mean everything. Higher the expense ratio, lower would be the competitiveness of a fund. SEBI has already imposed an upper limit on the expense ratio. Under such circumstances, salary disclosure may not serve any additional purpose.

We believe that there is nothing wrong in hiring the best talent and one should look at the positives rather than negatives. According to some legal experts, while SEBI has imposed stricter disclosure norms for better transparency, it has failed to clarify what objective the salary disclosures would achieve.

When you buy a car, you don't bother to know how much the top management of the car manufacturer earns. Do you? Rather you worry about the features and technological soundness of the vehicle.

PersonalFN is of the view that, investor education and better performance of schemes on offer are a win-win for both the mutual fund houses and investors. Forced disclosures hold little value and could distort investor mind-set.

Mutual funds are an effective investment avenue for long-term wealth creation and to achieve financial goals. Rather than focusing merely on how much your fund manager earns, a holistic assessment is imperative to select mutual funds prudently for your investment portfolio.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Should You Worry About How Much Your Fund Manager Earns?". Click here!


More Views on News

What They Forgot to Tell You About Sensex at One Lakh (Smart Contrarian)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

The Technological Marvel That is Ethereum (Outside View)

Feb 23, 2018

Have you been wondering what the hoopla about Ethereum is? It commands the second highest value among virtual currencies and its popularity is rivalled only by bitcoin. Let's break it down.

A New Quest for the Stock Market's MOST Profitable Ideas... (Smart Contrarian)

Feb 23, 2018

If you want to receive the best ideas in the Indian stick markets...you need to heed this important announcement.

Ramesh Damani is Bullish on Niche IT Stocks and I've Found One for You (The 5 Minute Wrapup)

Feb 23, 2018

This IT Company can be a huge wealth Creator for Smart Money Secret's Subscribers.

More Views on News

Most Popular

The Foundation for Sensex 100,000 is Laid(The 5 Minute Wrapup)

Feb 17, 2018

Top three reasons for Tanushree's presentation at Equitymaster Conference to be centered around a possible 30% correction.

India's Rs 1,66,276 Crore Problem(Vivek Kaul's Diary)

Feb 15, 2018

That's the loss, the government owned public sector enterprises are expected to make this year.

The Big Gamble(The Honest Truth)

Feb 15, 2018

Once you accept the fact that elections are round the corner and that this budget is geared to reach a 40% target, everything makes sense.

How I Beat the Index by 2x... And Why I Believe This Could Happen Again(Smart Contrarian)

Feb 12, 2018

Will Microcap Millionaires be able to replicate its past performance of beating the index by 2x?

NPAs Set to Rise Further with New RBI Rules(Chart Of The Day)

Feb 15, 2018

The RBI overhauls bad loan framework. Banks may come under additional pressure due to rising NPAs and increased provisioning.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Feb 23, 2018 12:07 PM