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Investing in mutual funds based on star managers? Your portfolio could suffer

With social media and online news now becoming a constant and never-ending source of inputs, there is a tendency among many AMCs (and fund managers) to subtly build a narrative around themselves

October 26, 2021 / 09:57 AM IST

Hero-worship isn’t new for the investment world. It is more prominent in stock investing. But, over the years, many mutual fund managers began to gather a fan following. To be fair, there is nothing wrong with that. I am sure that these managers and AMCs (asset management companies) would be doing something right (most importantly, delivering good returns).

Still, one should be careful about getting into the Hero-Worship mode when building the MF portfolio.

Building narratives online

With social media and online news now becoming a constant and never-ending source of inputs, there is a tendency among many AMCs (and fund managers) to subtly build a narrative around themselves.

They tend to (in small periodic doses of communications via social media and well-thought-out placements in financial media) put the fund manager or the AMC into a sort of heroic posture within a person's mind. You can call it a PR ploy or something else. But whatever word you use, there is no doubt that it’s being done. You just need to carefully look for it. So what exactly is hero-worship in MF investing?

Close

Many investors tend to use this 'hero worship' framework to pick funds managed by those managers/AMCs. In the absence of a proper MF selection framework, it’s quite natural for investors to gravitate towards names they are already familiar with and they ‘look up to.’

But hero-worship can be a dangerous mental shortcut that works for some time, but never forever.

I am sure many would remember a few of the popular star fund managers of yesteryears who were looked up to, had sort of cult following and whatever they said was treated as absolute truth.

Did they remain on the high pedestal forever? Nope!

The return profile of their funds fell over time. Eventually, they never lived up to the hype that was built around them (knowingly or unknowingly).

Those investors who trusted their money with such ‘heroes’ never got the good returns that they deserved and which they could have generated had they diversified their investments properly instead of concentrating them with their heroes.

Justifying wrong decisions

Hero worship tends to make you blind to certain realities. You tend to justify all the actions, irrespective of whether you understand them or not. The critical lens of reasoning is thrown out of the window in many such cases. A case in point is Elon Musk (Disclaimer: I am a huge fan). He is worshipped like anything by his followers. And to be fair to him, he is indeed changing the dynamics of the industries he is in. But it’s the hero worship angle here and his personality that has to a large extent taken Tesla (an operationally small auto manufacturer he founded) to have a market cap that is far greater than the combined market cap of several of the world’s largest car manufacturers!

I will be honest here. I am personally not a marketing person or have much knowledge about how the PR thing is managed by those in the MF space. But at times, it’s quite obvious that subtly designed positive PR stories, messages and threads on Twitter, etc. are being pushed to build a connect with the investor community. Nothing wrong as such here, but you as an investor need to know how you are being influenced. (And if you didn’t notice, even I am trying to influence you here right now!)

As an investor, you need to remember that even heroes can be wrong. The way out is simple diversification.

Unless your portfolio is very small, it is best to diversify your MF investments across categories, AMCs and styles. It is always good to concentrate, but only to an extent. You don’t want to over diversify. So how do you do it actually?

-First, understand how to pick the right funds. You need to have a proper fund selection framework and can’t go by gut feel or hero worship here. If you don’t know how to do that, stick to index funds. Else, get in touch with a good investment advisor to help you build your MF portfolio.

-Remember, no strategy or style or fund manager works forever. So, move up the maturity profile, beyond your fascination with heroes and spread your bets a bit.

-Unless you only invest in index funds, it’s best to have funds from at least a few AMCs and different fund managers. You needn’t invest in all the fund categories out there. You only need a few MF categories to pick a few good schemes and your job is done.
Dev Ashish The writer is the founder of StableInvestor.com
first published: Oct 26, 2021 09:57 am

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