he central idea of a mutual fund investment is to leave the job of managing your money to a professional fund manager.

When you invest money in a fund, what you are doing is basically hiring a fund manager to manage your money.

And the success with which he is able to take the right calls on behalf of the investors gets reflected in the performance of his fund. Hence, the fund manager is the one who is finally responsible for your fund's performance, whether good or bad.

When you evaluate a fund's return or risk, what you are actually evaluating is the return that the fund manager earned and the risks that he took.

So when you screen funds on the basis of their performance record and kind of returns they have been able to deliver as compared to their peers, you are comparing the ability of one fund manager vis-�-vis the rest.

This means that the continuity of fund management is important to a fund.

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So what happens when he leaves?

Changes in fund managers are not rare.

In fact, the frequency at which fund manager shuffle around is pretty high in India. The fund industry is in a state of continuous flux.

Looking at the performance of funds that have witnessed changes in the fund manager, any apprehension should vanish.

In practice, fund manager changes have not really harmed investors, as Asset Management Companies (mutual fund houses) manage to replace departing fund managers competently.

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What the track record shows

We looked at diversified equity funds in existence since 2000 that have experienced a change in the fund manager at least twice.

Moreover, we picked up funds that experienced the first change by the end of 2003, so that we could see a sufficient performance record and pre- and post-change.

We identified 17 such funds.

Upon comparing quarterly returns of these funds, vis-�-vis their peers, we concluded that a change in the fund manager did not have a significant impact on the performance of the funds.

The bad funds continued to perform badly while the good ones continued to deliver above average returns.

A look at the portfolios reveal that there have not been massive churnings and portfolio makeovers.

There have been instances of sectoral reshuffles. For example, after a change of the fund manager of Canexpo in December 2004, sectors like consumer durables, consumer non-durables and financial services were added to the portfolio. While investment in the services sector reduced significantly.

Or, take the case of the change in manager of Alliance Basic Industries during September 2003. The number of stocks went down from 23 to 17. However, the amount of money invested in the top five stocks rose from 43.8% to 52%.

Should you be concerned?

As an investor, one should not feel too concerned if his fund faces a change in the manager. This is because a fund's performance is not solely dependent upon a fund manager, but on the quality of the entire research team.

A change in the fund manager does have the potential to bring significant changes to the way the fund is run. However, you as an investor should not press the alarm button too soon.

Ideally, it should only raise your level of attention towards your fund so that you track its performance a little more closely for the next few months.

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What you must note

- Is the new fund manager investing too much in a few stocks or a few sectors? Are you more comfortable with a more diversified portfolio?

- Do not only look at your fund. Keep an eye on other funds managed by your fund manager. Chances are that he may be handling more than one fund in an AMC. Are they all performing badly? Then you should consider exiting the fund.

- Watch the performance of the fund manager in a bull (stock prices climb upward and sentiment is good) and bear (the reverse of a bull market) market. As you gain experience as an investor, you will find it useful to observe what kind of investments and market conditions your fund manager does well in and what kind of situations trip him up.

- If you find that your fund consistently underperforms others in the category, you must consider shifting funds. Or, if you find that the performance had dipped after the new fund manager has taken over, then the alarm bells must ring.

Illustration: Uttam Ghosh