Understanding the key metrics employed by mutual fund managers for stock picking and their impact on active management in India

Abstract

Investments is still in a nascent stage in India. Being a developing country, it is much ahead of other developing countries, but also significantly lags behind not just in penetration of investing activity, but also the efficiency of the capital markets. Mutual funds are an easy investing option where own discretion is replaced by expert professionals known as fund managers. These experts not only manage the diversification of risk but are also responsible fo r generating the alpha. Mutual funds are baskets of investments including equity, debt, gold, bullion, etc individually or a mix of the instruments along w ith cash. Major characteristics like being under supervision of SEBI, managed by professionals, providing small ticket size and liquidity make them a safer yet worthy investment option. When we think of a basket of stocks, the first question would be, why not replicate the index, since in itself, it is a basket oftop performing securities. This leads to the analysis of active vs passive fund management. To understand this, it is necessary to understand the va rious types offunds, classes of investors, managers and investment philosophies. While blue chip or large cap funds have lesser variety of instruments, they are considered safe and predictable. Th is ca lls for replicating the index and is gaining prevalence in capita I market investments. But as the pool of investments gets bigger and more unpredictable, which is represented by the mid and small cap space, investments become a high risk high reward game. Add it ional facto rs used in picking the right opportunit ies by global fund managers provide an opportunity for replication in the Indian market with other qualitative factors.