A new category of mutual fund is coming into being in India. This method takes out the human element from the entire exercise of decision-making and investment decisions are taken through automatic systems that are programmed to do so. Though it has some benefits, there are some risks that arise in the process, making it necessary for the investor to have a proper knowledge of the whole process.
Under a normal asset management situation the fund manager takes various investing decisions. But when it comes to programmed investing, the computer decides on the orders. Here the computer, based on various pre set parameters arrives at a decision on investments and then these are implemented according to the way in which they have been structured. Thus, human intervention is almost eliminated after the parameters are programmed.
Buy and sell
This covers the entire spectrum of trading decisions – buying and selling. Purchase decisions that involve selecting a particular share for the portfolio is also covered and due to this there can be a situation where the decision for a purchase are determined with the help of the parameters (intelligent and data-based ones) that has been set. Similarly, the trigger for a sale action is also programmed and this will be completed the moment the particular target for the stock or stocks has been reached in the market, automatically. Thus, this covers both the ends and if there is a fund manager, he has virtually nothing to do except check the functioning of the programme randomly.
There is a certain element of risk that the entire process involves. The risk is that in many cases the decisions are taken keeping just the parameters in mind and that there is no human evaluation that takes place in the entire process. There are times like when there is a change in sentiment or some other position when the human element comes into play. But when it comes to this kind of trading, the rules and the available data are all that matters. Opportunities for buying or selling based on subjective factors like quality of management will also go unnoticed or are missed. There is no one who will be able to look at the situation and take some additional decisions about risk or any other subjective matters.
The final decision about investing such funds depends upon the investors and whether they have some specific requirements as far as the structure of their investments is concerned. Their comfort level also matters and they might want to ensure that there is some order in the investment and this will be taken care of through this route.
The writer is a certified financial planner