The mutual fund industry has come a long way since Unit Trust of India (UTI) was established to distribute mutual funds with its first scheme, Unit Scheme 1964. Today, we have 41 active mutual fund houses, more commonly referred to as asset management companies ( AMC) with assets under management (AUM) of Rs 20.40 lakh crore as of September 2017. The largest AMC (ICICI Prudential) has an AUM of Rs 2.79 lakh crore and the smallest fund house (Shriram Mutual Fund) has an AUM of Rs 42.63 crore, as of September 2017.
Investors are spoilt for choices
Today, there are more than 1964 schemes (open and close ended) and an investor is also confused. Too many schemes and too many choices are a perfect recipe for an investor to make a sub-optimal decision. This month, the markets regulator has issued a circular for rationalisation of schemes. The top seven AMCs handle more than `14.56 lakh crore of corpus, which is close to 2/3rd of the overall AUM. Where does it leave the rest of the AMCs to attract the investors to invest in the schemes offered by them? With asset classes such as real estate, gold and fixed income disappointing the investors, financial assets, especially equity mutual funds, have been gaining traction and acceptance. In the last 18 months, the mutual fund industry has noticed a steady stream of investors investing in the schemes as lumpsum and Systematic Investment Plans (SIP) have been noticing regular investment flows.
How to pick up a scheme
While choosing a mutual fund scheme an investor is in a dilemma about which mutual fund scheme of the AMC to choose. Should one choose a scheme from among the well-established Top 5 or Top 10 AMCs? Should one ignore the schemes offered by the other AMCs? There is no right or wrong answer to this question. In fact, UTI was the first mutual fund house supported by the government and now has four banks as its sponsors. However, it is not in the Top 5 AMCs in terms of AUM. Over the last five years, AMCs have seen consolidation or takeover. Fidelity AMC was taken over by L&T Mutual Fund AMC, so was the case with Morgan Stanley AMC which was taken over by HDFC Mutual Fund. Riding on the strength of its performance in a period of less than four years, one of the latest entrants in the AMC space has garnered assets over Rs 9,000 crore with its NAV growth at 2.6 times in the same period, as of September 2017. At the same time, the industry has also noticed the exits of high profile marquee names, namely JP Morgan, Morgan Stanley and Fidelity.
Performance matters the most
Having stated this, an existing AMC with a large AUM inspires confidence among the investors, especially first-timers, in mutual fund investments. The AMC being in existence for a longer duration with performance record over multiple periods of time and handled by fund managers who have been handling the investment corpus is a definite plus. At the end of the day, it’s the performance of the AMC which matters. Many a time, having a lower AUM can also mean that the fund manager can execute strategies which can be performance enhancing in the short term, thereby attracting investors to the fund house. For larger AMCs, the stability factor is a huge plus. Every AMC, when it started out, started small. It builds up its AUM over a period of time on the strength of its performance, distribution network and credible fund manager. The first mover advantage or early mover advantage works for a certain period of time, but then, the above mentioned attributes are more fundamental to the growth of the AMC and its existing schemes and attracting investors.
The writer is partner, BellWether Advisors LLP