Are you susceptible to fund manager risk?

Aside from the other systematic and unsystematic risks, investing in a mutual fund entails fund manager risk. In this post, we talk about fund manager risk and the steps to resolve it.

When you invest in mutual funds, whether equity, debt, or hybrid, you accept certain risks. Equity funds primarily involve market risk, concentration risk, over-diversification risk, and so on. Debt Funds, on the other hand, are subject to interest rate risk, reinvestment risk, credit risk, concentration risk, and other risks. The most prevalent risk among all mutual funds, however, is fund manager risk.

You may be wondering why to look at fund manager risk. A fund manager is analogous to a ship's captain. The ship's course is determined by the captain's commands. Similarly, although the investing methodology is that of an asset management company (AMC), the stocks are chosen by the fund manager.

However, the recent front running case in Axis Mutual Fund has aroused new worries about mutual fund investing. This occurred when the wounds from the Franklin debacle were still healing. As a result, such incidents erode investor trust in an already under-penetrated industry.

As a result, in this case, passive investment appears to be the ideal strategy to gain exposure to both the equities and debt markets. You may anticipate market gains because most passive funds just mimic the underlying benchmark indices. Furthermore, passive funds liberate you from the fund selection procedure. You can put your money into any passive fund that has a lower tracking error and expense ratio.

Indeed, the Securities and Exchange Board of India (SEBI) has approved the introduction of passively managed Equity Linked Saving Schemes (ELSS) funds by AMCs. Furthermore, SEBI desires that the funds monitor the benchmark index of the top 250 businesses. As a result, we may expect to see several AMCs launch passively managed ELSS schemes soon.