Mutual funds are claimed to be the simplest way of having a sound portfolio of investments according to one’s financial goals. Still, those planning to start investing in mutual funds are often seen mulling over whether to invest in MFs through just one fund house or spread their investments across funds of more than one fund house? That is because both have their own advantages and disadvantages.
Experts say investing across fund houses provides an investor with the advantage of diversifying across various strategies adopted by different fund houses as well as fund managers. It also helps diversify risks as a fund manager may suddenly move on. Also, investing across fund houses allows investors to choose the best fund in each category. For instance, a certain fund house may be good in its equity strategy while certain others may be good in debt.
“Restricting oneself to a single fund house would leave the investor with sub-optimal funds. Investing across fund houses hence helps diversify risks and also enjoy the best strategies for different categories of funds,” says Vidya Bala, Head of Mutual Fund Research, fundsindia.com.
Another way to invest in MFs is that an investor with a low investible surplus can start with one fund and then add on to others based on his/her asset allocation requirement. However, it is noteworthy that an investor should not end up duplicating his/her portfolio by investing in funds from every single fund house. This may lead to a sub-optimal strategy, says Bala.
According to experts, the decision to invest in mutual funds also depends on the type of fund you’re considering.
For instance, “if you’re considering investing in a fund where the return is significantly dependent on the manager’s skill, then the fund house promoting the fund is less important, and there’s no particular advantage to concentrating your investments in one fund house,” says Peter Douglas, Principle, Chartered Alternative Investment Analyst (CAIA) Singapore.
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Funds dependent on manager skill would typically include funds investing in less mainstream strategies (for example, small cap equities, corporate bonds, overseas assets), and certainly any investing in alternative investment strategies such as absolute return, hedge funds, real estate funds, private equity, etc. For these types of funds, the fund house provides the operations, marketing, and regulatory framework, but your return will depend largely on the skill of the individual fund manager or her team, not on the fund house.
If, however you’re investing in a fund where the fund’s return is not particularly dependent on manager skill, then you might simplify your personal administration load if you focus on one fund house.
Funds less dependent on manager skill would certainly include index funds and ETFs, and ‘plain vanilla’ funds such as large-cap equity funds, money market funds, etc. The fund house provides all the services described above, but the fund manager’s input will make little difference compared with the effect of general market movements, and hence there’s little to be gained by following the manager rather than the fund house.
“There’s unlikely to be any advantage to your overall return, however, by investing in just one fund house, and unless you’re a very large investor you probably won’t see any fee reduction by concentrating your assets. The advantage is almost entirely that you’ll be corresponding with, and receiving information from, one fund house rather than several. This may save you valuable time which you can use to do something more constructive than dealing with paperwork,” says Douglas.