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Excited about the entry of many new-age fund houses? Wait before investing in their schemes

Unless the NFOs from new fund houses offer something unique, you should not rush to invest your money

October 21, 2021 / 10:07 AM IST

Several new fund houses joining the already crowded Indian AMC (asset management company) space. But given that we have less than 5 percent equity penetration here, this may exactly be what will help further the reach of mutual funds in the country by bringing in new investors via technology-enabled solutions.

The top-10 AMCs by AUM (assets under management) hold about 80-85 percent market share. So, a little competition will definitely lead to product innovation. It may also trigger a race to reduce expenses to some extent. How low can expenses go? A few months back, one of the new AMCs launched the cheapest index fund! And just to let you know, a few index funds abroad have had zero expenses, too!

New fund houses and adventurous investors

While new AMCs are good for the industry as a whole, what about investors like you and me who have already been investing in several schemes of existing players for years?

Your excitement about more options to choose from is justified. But does it mean that you should just rush to invest in the NFOs (new fund offers) of these new AMCs?

Close

This might sound boring, but there really is no hurry to do so.

All major existing fund houses already have well-established proven schemes in all the major and relevant fund categories. Remember, you don’t have to invest in all the fund categories out there. Just a few are more than enough. Also, these existing schemes have several years of track record and many have seen multiple market cycles and stood the test of time. So, that vintage should hold some weightage when you pick funds that are consistent and reliable.

Unless the NFOs from new AMCs offer something unique, you should not rush to hand over your money.

Any new fund you bring in should have a good fit in the overall MF portfolio. You don’t want a zoo of unique funds. You are an investor and you should just aim to have a sufficiently diversified and focused MF portfolio with varying exposures to market-caps, styles, categories, etc. That’s it.

If you are really excited and want to get a taste of the new offerings, then start with small amounts. Don’t invest a major chunk of your money in new AMCs. Let them prove themselves first.

Are more choices desirable?

But there is one more issue here that the ‘more-the-merrier’ brigade is missing. As more and more new AMCs start their business, they will try to launch new strategies and options to attract investors. Existing players, too, will replicate some of those ideas and launch their own versions. The result? These will increase the clutter in the already crowded MF space. Many investors will then have a tough time picking the right funds for their portfolios. Just a second-order impact of the change that is happening now that I thought was worth mentioning.

In a few years’ time, I am sure the AMC rankings will change to some extent. But it’s too soon to say that there will be a quick shake-up of the industry. Incumbents are solid players in their own right with their trust, brand, etc. They too will not go down quietly. And from what I understand, it’s not that easy to create a competitive advantage in the MF industry. Newly launched strategies don’t have patents and if they start delivering returns, then they can be easily replicated by others in no time. So the next few years are bound to be pretty exciting as to how both sides (new vs old) respond to each other’s moves.

Please note that my view about ‘not rushing’ is from an investor’s perspective. With regards to the entry of new players, I am all for it and it’s a welcome expansion. The new AMCs, I am sure, will do a good job themselves, and keep existing players on their toes, forcing everyone to think out of the box, help expose the underperformers and bring more innovative investment ideas (such as silver ETFs) on the table among other things.
Dev Ashish The writer is the founder of StableInvestor.com
first published: Oct 21, 2021 10:07 am

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