Should you mimic mutual fund managers’ stock picks?
The better way, some think, is to be with the big boys – buy what big fund managers are buying. But is it a good idea?
Nifty at 10K has made many equity investors nervous. The talk of overvalued stocks on one hand and the rise in geo-political risks on the other has made many look for better investment bets in stocks. The better way, some think, is to be with the big boys – buy what big fund managers are buying. But is it a good idea?
“We never advocate mimicking a fund manager’s buy-sale transactions as the investor rarely knows the rationale behind the investment decisions and seldom gets the entry and exit right. Investors may also go wrong on the sector and stock allocation in their portfolios,” says Nishant Agarwal, Head of Products, Investment Advisory and Family Office, ASK Wealth Advisors.
Whom to mimic
There are hundreds of equity schemes and they are managed by different fund managers. The top performing schemes keep changing over a period of time making it difficult to choose the fund managers for mimicking purpose. Even if you zero in on a set of fund managers, they invest across the schemes that have differing objectives which may not suit your investment needs.
What if you decide to track two fund managers and one of them sells a stock to another? In any transaction, there are two parties – buyer and seller. If a fund manager is buying there may be some other investor selling the same stock. One of them will get it right.
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You generally do not know the price the fund manager paid
“Mutual fund portfolios as at end of the month are disclosed in the following month with a lag of around 10 days,” says Prakash Ranjan Sinha, Mumbai based independent investment coach. In a volatile market, the fund manager may get to pick large chunk of a stock on a weak day, keeping his buy price at a relatively low level. In case of mid and small cap stocks, when the ‘fund action’ is revealed to the market, the stock catches the investors’ fancy and price jumps. You may not get to buy the price at which the fund manager buys. This can significantly impact your returns, Sinha adds.
“Each stock purchased by the fund manager may have a different weight in the scheme portfolio. The stock weight also depends on the sector allocation,” points out Agarwal. If a particular stock bought by the fund manager accounts for only 3% of his scheme’s portfolio, you too should have similar allocation. Not many understand this. A typical individual investor will hold maximum 15-20 stocks in his portfolio whereas a fund manager has exposure to as many as 100 stocks across schemes.
Track it and exit right
Fund managers have team of professionals to track their investments in a live market. “Change in fundamentals may compel a fund manager to sell the stock in the market. An investor comes to know about such exits generally with a lag,” says Sinha.
An individual investor may find it difficult to track a stock on an ongoing basis. In case of mid- and small-cap stocks where there is not much of research coverage, there is a fair chance that he may miss out on vital changes in fundamentals and price actions too. Getting both entry and exit right is important.
When one is mimicking a fund manager, he has to mimic all the trades of the fund manager. As the fund manager won’t get all his trades right, to ensure good risk adjusted returns all the trades need to be replicated with same allocations percentage wise. This is next to impossible for most retail investors, given aforesaid operational issues. That makes an individual investor's success rate widely differ from that of the fund manager.There are many successful fund managers who try to ‘clone’ the moves of legendary investors like Warren Buffett. But these fund managers do not blindly follow the legendary investors. In most of these cases, they apply their logic and efforts before committing their hard earned money. Never try to blindly follow a fund manager. Instead invest in a mutual fund scheme that suits your risk profile and financial goals.