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Should You Worry About How Much Your Fund Manager Earns? - Outside View by PersonalFN
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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.

Disclaimer:

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.

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