Are equity fund managers sitting on a ticking time bomb?

Confessions of a fund manager

Our conversation with a senior mutual fund executive, who spoke anonymously, revealed the pressures equity fund managers face during small-cap rallies.

Outsized returns, outsized risks

Fund managers, who are pressured to perform and deliver above-average returns to their investors, feel compelled to participate in small-cap booms despite knowing the risks.

Heated competition

Fund managers strive to deliver above-average returns to stand out from its competitors. But the flip side is that chasing high returns can make them take high risks.

Little option but to participate

If fund managers decide to stay out of the rally, they risk underperforming compared to peers. As a result, investors would start pulling out money from the fund.

Tricky situation

This is one of those situations where investors' short-termism and the business reality of running open-ended funds create a minefield for fund managers.

Do individual investors have the power of choice?

The good news is that investors like us don’t face these pressures. However, we are driven by FOMO and decide to participate in small-cap rallies.

What drives the volatility past the breaking point?

This herd mentality can be risky. It can lead to inflated valuations and, ultimately, significant corrections.

Our advice

Strike a balance between pursuing attractive short-term opportunities and steadfastly focusing on long-term investment principles.

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