Professional Management of Mutual Funds

Managing an investment portfolio entails selecting and supervising the fund's holdings. The investment professionals who manage the fund must do so strictly in accordance with the fund's basic investment objectives and policies.

For instance, if you invest in a particular balanced fund, you may be promised that a highly diversified list of blue chip stocks will comprise 60% to 70% of total net assets and a diversified list of high-grade bonds will comprise the remainder. The professional manager has an obligation to meet these standards under all circumstances.

Mutual funds use professional managers to make the decisions regarding which companies' securities should be bought and sold. The managers of the mutual fund decide how the pooled funds will be invested. Investment opportunities are abundant and complex.

Fund managers are expected to know what is available, the risks and gains possible, the cost of acquiring and selling the investments, and the laws and regulations in the industry. The ability of the managers to select profitable investments and to sell those likely to decline in value is a key factor for the mutual fund to earn money for the investors.

Managers must also endeavor to add value over and above the returns generally provided in the financial markets in which they work, a challenging task. On the one hand, it might seem the supreme irony that, on average, the records of professional portfolio managers of mutual funds are undistinguished when compared to unmanaged averages of the returns achieved in the broad financial markets.

On the other hand, since it is impossible for all managers as a group to add value in the aggregate, it is not at all surprising that the performance records of many professional investment advisers leave much to be desired. To say the least, the market is a tough bogey.