Usain Bolt might be the fastest man in the world, but speed records can't remain unbroken forever. And before you jump the fence, this isn't about someone challenging the Jamaican athlete in the 100 or 200 meters sprint. In any case, he might be long gone before another runner catches up with him. This race is different; one that doesn't involve contestants, cars, or bikes. The race for expansion of mutual fund houses is getting more intense. Yes, there are mutual fund houses in India going hell for leather. In brief, the market rally that started out in late 2013 has sustained itself for nearly 2 years now. And the eye-popping growth in the Assets under Management (AUM) of a few fund houses hasn't happened by chance.
The three factors behind it are:
- Good market conditions;
- A period of risk-on leading to a change in the risk appetite of investors; and
- Aggressive marketing strategies adopted by mutual fund houses
The decisive mandate obtained by Modi-led-NDA Government in the 2014 Lok Sabha elections has led to a period of exuberance and hope across all industries in India. Foreign Institutional Investors (FIIs) have exuded confidence in the Indian economy and this has uplifted the market sentiments. Domestic mutual funds turned 'net buyer' in the Indian equity market since May last year to gain maximum advantage of these opportunities, and retail investors have evinced interest in the market too.
Top 5 Fund Houses - by Average AUM
(Source: AMFI, PersonalFN Research)
The chart above depicts how the AUM of top five mutual fund houses has grown over a period of one year. Competition among the top three players has become even fierce, with the gap between their AUMs narrowing rapidly.
Should you go with the biggies?
We generally tend to invest with bigger names, trusting them over lesser-known smaller players. However in the world of finance, investing is all about trust, safety, and real-time performance. Ideally, better performance should result in greater popularity; but unfortunately, this hasn't always been true in the case of mutual fund houses. If you think bigger fund houses are always better, well, this could be because many mutual funds houses have resorted to:
- Building strong distribution network;
- Doling high upfront commissions to distributors (leading to product pushing and
- mis-selling); and Launching New Fund Offers (NFOs) when market sentiments are enthused
There are individual schemes from a few mutual fund houses that are equivalent to the size of smaller fund houses. Barring the exceptions, it is difficult for an existing fund to grow beyond a point unless its performance is extraordinary. Under such circumstances, fund houses play with NFOs which, more often than not, offer little novelty.
As per the data from ACE MF, mutual fund houses have launched 108 NFOs from April 01, 2014 till date in the equity category alone (i.e. excluding hybrid and debt schemes.) Now out of these, 74 are close-ended funds -- ones that can't be redeemed before the lock-in period. Amusingly, a series of close-ended equity schemes were launched one after the other, defying the need for these to have been close-ended offers in the first place. Moreover, being close-ended in nature, the money automatically stays with mutual fund houses until end of term without its performance being questioned.
Who among top five has launched the most NFOs?
Nevertheless, intelligent marketing strategies and aggressive sales through every possible distribution channels have worked in favour of the larger fund houses. This seems to be easier than working intensively on existing schemes and consistent performance.
Wake up call...
Selecting a mutual fund scheme based on its AUM size is rather absurd. Yes, we call it absurdity because the ability of a fund to sail through distress times is in the competent functioning of its stock picking, which is reflected through the investment processes and systems followed by the fund house. Mind you, this isn't to say that all mutual schemes with large AUMs are unwholesome. But if you make your investment decisions sorely based on the pro-large-AUM-size pitch given by your agent/distributor/relationship manager, it will certainly prove to be unhealthy in the long term and may erode your wealth.
Besides performance, it is vital to determine whether the mutual fund scheme follows sound investment processes and systems. This gives you a fair idea if your money follows an investment philosophy when it's deployed in the equity markets or whether it's going to be risked for 'momentum' ploys. It is best to prefer those performing consistently across timeframes and market conditions.
There is no point being carried away by upbeat market sentiments and the perception of other investors. It is your hard earned money and thus it is imperative to handle it with foresight and prudence. When you invest, focus on your financial goals and maximizing your personalised asset allocation.
Let's remember that Usain Bolt has his guard up during the race; he doesn't think about who's watching him or how grand the celebrations are going to be after he's won. All he thinks about is running like he has never ran before. This makes him the best in the world. What about you, as an investor?
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