Importance of manager selection while making investments

A common investor typically does not pay attention to importance of manager selection while making investment decisions. These investments are typically in fixed income or equities either through mutual fund or insurance ULIP. If the right due diligence is not done, the investment could result in sub standard returns.

A few of the common questions any investor should ask:

1. Consistency of past returns. This can be determined by taking quarterly returns for the last 2 years atleast and comparing them to the benchmark the investor is most familiar with. e.g. for equities, it could be Sensex and for debt, it could be Bank FDs.

2. View on the asset class: Investor needs to ask why he is putting money in the asset class. Will he make money in the near future? Is the asset class expensive or cheap? in case of equities, what is the valuation (this can be figured out by going to www.nseindia.com, click on indices and go to statistics tab). PE below 10 is cheap while more than 18 is expensive for India.

3. Volatility of returns: Are the returns volatile? more or less? this can be found out by calculating standard deviation of the returns. On can take historical NAV of the fund, calculate daily returns, and then calculate standard deviation.

4. Stability of the investment team: The team which is managing the investment function and the fund manager who will manage the particular scheme, is he there for long? Typically the team should be there for more than 2 years. This can be found out by either going to factsheets available on the fund house website or looking for addendums on the fund house website or simply calling up the fund house and asking the questions.

More later..