Stock markets can be a rough place for amateur investors. With little or no experience, many lay investors burn their fingers badly in the stock markets never to return again. But stock markets have nothing against lay investors in particular; they are democratic and therefore treat experts and amateurs alike. How else can you explain star fund managers suffering the same fate as lay investors during a market fall?

When it suits them, fund houses promote a star fund manager to draw investors. The star fund manager's track record in identifying stocks/trends is publicised extensively. NFOs (new fund offers) are launched on the premise that the star fund manager will repeat his stellar performance and give investors a good enough reason to invest in the NFO.

One fund house that has played the star fund manager card to the hilt is JM Mutual Fund. Sandip Sabharwal (ex-Head Equities at SBI [Get Quote] Mutual Fund) who earned his spurs in SBI Mutual Fund became something of a mid cap guru over there. So it's not surprising that other fund houses were just as happy to 'promote' his fund management expertise. The latest to use his name is JM Mutual Fund.

Thankfully, Sebi (Securities and Exchange Board of India) has now virtually strangled the NFO flurry by introducing a host of investor-friendly regulations; but when NFOs were hot, JM Mutual Fund was unrestrained in using the star fund manager platform to push its NFOs.

YTD Losers: JM Mutual Fund hogs the rankings

(Year to date return indicates the performance of the mutual fund since the beginning of the calendar year upto March 28, 2008. The growth option has been considered for all mutual funds. Only the top 10 losers have been listed. NAVs as on March 28, 2008.)

With Sandip Sabharwal's entry in the fund house, mid caps started appearing noticeably in many of JM Mutual Fund's equity funds. It was clear that the mid cap guru was weaving his magic.

And for a while, his funds (particularly JM Basic) started appearing higher in the rankings. In its communication, JM Mutual Fund smugly asserted how their star fund manager had justified investor expectations.

When domestic markets tanked in the wake of the subprime crisis, mid caps were hit hardest. In a cascading effect, equity funds with higher allocations to mid caps fared just as adversely. Gone was the magic of the star fund managers.

Markets proved yet again that they treat everyone alike, regardless of the investor's status and reputation.

Given its higher exposure to mid caps, equity funds from JM Mutual Fund were hit particularly hard during the market slide.Of the top 10 losers in 2008, three equity funds are from JM Mutual Fund (refer table) . Investors who believed that investing in equity funds from JM Mutual Fund was a smart decision suddenly started having second thoughts. In our view, these investors got two things wrong; mistakes that by now are very common in the Indian context.

a. Star fund managers are a short-term phenomenon

At Personalfn, we have never been great fans of star fund managers. In our view, over the long-term they do more harm than good to the funds they are managing as also its investors. We have already seen many star fund managers prove this; investors will recall Bharat Shah and Samir Arora from the tech rally in 1999-2000.

Even when the star fund manger gets his calls right, investors can benefit from his expertise only till the time he is associated with the fund house. Once he quits, so does the performance.

When the star fund manager quits, most investment teams find it difficult to replicate the spark that was provided by him. Of course, the fund house on its part will try to pacify concerned investors by asserting that it can sustain its performance without the star fund manager.

While only time can tell whether or not they can manage without him, the moot point is if the fund house is so confident of its own investment processes, they really shouldn't have used the star fund manager's name to promote their funds in the first place.

That is the harsh reality for fund houses; they first put the star fund manager on a pedestal so much so that investors associate the fund house with the star fund manager (ideally it should be the other way around). When the star fund manager quits, the fund house is on the defensive and is reduced to reminding investors that its investment processes take precedence over any star fund manager.

b. Mid caps are a double-edged sword

Another lesson for investors is that mid caps can be a double-edged sword. If carefully selected, mid caps can add significantly to the overall portfolio. But that is no reason to go overboard in mid caps, as some diversified equity funds have done. These funds are usually adversely hit during stock market volatility; the present scenario is a case in point (most funds in the YTD losers list are predominantly invested in mid caps).

• Mid Cap Funds: For the long term

Our advice to investors is relatively straightforward -- invest with a fund house that relies on well-defined investment processes and not star fund managers. As pointed out, star fund managers can be a short-term phenomenon, while process-driven fund houses are relatively more permanent.

Make the most of Sebi's 'zero entry load' guideline. Read on.