Thirty-eight asset management companies (AMCs) already present in the Rs7.6 trillion Indian mutual funds (MF) industry may look like a large crowd. But when only about 7.6% of India’s savings are invested in the equity markets against 57% in fixed deposits, industry experts say there’s a lot of work to be done. On offer, therefore, are not just 38 existing firms, but also 23 new AMCs waiting in the pipeline to launch.
Some, such as Axis Asset Management Co. Ltd and Peerless Asset Management Co. Ltd, recently made their entry in the industry and launched their first schemes, while newcomer L&T Finance Ltd recently acquired the erstwhile 13-year-old DBS Cholamandalam Asset Management Co. Ltd.
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New entrants increase choice and competition, but have no past performance to show. So, should you give them your money to manage? A look at what clicks and what doesn’t for a new fund house and how you should evaluate them.
A strong partner
Among newcomers, those with a strong distribution tie-up can get off to a winning start. For instance, Axis AMC is sponsored by a bank, Axis Bank Ltd. For an MF, it pays to have a bank as its parent or sponsor. Here’s why.
MFs need distributors to sell their products. Banks are the biggest distributors for fund houses because they have access to a large number of people who have accounts with them. Their quality of advice notwithstanding, they offer convenience as it is easy for bank customers to shift money from their bank accounts to MFs. “Customers of Axis Bank are already familiar with the bank’s brand. Axis MF is merely a part of the bank’s business,” says Rajiv Anand, chief executive officer, Axis AMC.
Out of Rs909 crore that Axis Equity Fund (AEF), its first equity offering, collected in its new fund offer period, Axis Bank mobilized around Rs700 crore or 75-80% of the amount. Out of 138,000 investors of AEF, 95,000 invested through the bank’s network.
Having a captive investor base—a set of investors with whom the fund house or its parent company is already in touch with—bodes well for a new firm. Peerless AMC’s sponsor, Peerless General Finance and Investment Co. Ltd (PGFIC) was one of the two largest residual non-banking finance companies (NBFCs) with combined deposits of around Rs15,000 crore or around 77% of the deposits with all NBFCs. At present, PGFIC has about eight million customers in its fold.
Following the directives of the Reserve Bank of India to stop accepting fresh fixed deposits, PGFIC decided to launch a fund house. Although Peerless AMC has launched only its liquid and ultra short-term fund so far, it is pinning its hope on its monthly income plan (MIP) that it hopes to launch soon. “Since our investors were used to investing in fixed deposits, we believe an MIP would come closest in terms of structure. True, the investor has to take additional risks, but it’ll be worth it given the track record of MIPs,” says Akshay Gupta, chief executive officer, Peerless AMC.
Is there anything new?
As investors, you need to ask yourself: what is different in the new fund house’s offering? Says Yogesh Kalwani, head (investment advisory), BNP Paribas-Private Banking: “If the fund house is offering a new concept, it may make sense going for it. For instance, a feeder fund or a fund that mobilizes savings in India and invests in its international parent’s existing fund that invests in assets or segments not available in India.”
Adds Kalwani: “A minimum track record of one year is necessary before looking at a new fund house.”
For instance when Benchmark Asset Management Co. Ltd was launched in 2001, it was India’s first fund house specializing in exchange-traded funds (ETFs) and passive funds. Although ETFs and passive funds account for less than 1% of the total assets under management of the Indian MF industry, Benchmark AMC has stuck to its beliefs, so far, and only offers passively managed funds.
Take Quantum Asset Management Co. Ltd, India’s first no-load fund, which avoided distributors and, therefore, also fees which would have otherwise come out of your pockets. Take the case of Fidelity Asset Management Co. Ltd, the world’s largest fund house that launched in India in 2005. “Even if I would not have recommended Fidelity, being the world’s largest would have evoked a lot of interest by itself,” claims Rakesh Rawal, chief executive offer, wealth management, Anand Rathi Financial Services Ltd.
New fund, old manager
Sometimes the fund house may be new, but the fund managers may have had prior experience in managing MFs. For instance, Rajiv Anand who heads Axis MF was earlier the chief investment office at IDFC Asset Management Co. Ltd. Few would recollect its equity fund manager, Chandresh Nigam—back in the MF industry after four-and-a-half years— had a good track record in managing Zurich Equity Fund, which is now known as HDFC Equity Fund with Prashant Jain as its fund manager. Jain was Nigam’s boss before HDFC MF acquired Zurich MF in 2003. But does that mean they will be able to replicate success?
“Not necessarily,” says Rawal, “Fund managers have a whole team, ranging from junior fund managers, analysts to research reports or inputs from brokers outside his fund house that contribute to his success. Even the fund house’s work environment and culture contributes.” When the fund manager changes jobs, several factors change, says Rawal.
Kalwani adds: “An Indian fund house may offer lots of freedom to the fund manager. On the other hand, a foreign fund house may impose a lot of restrictions on the same fund manager. He will be far more controlled and sobered down.”
What should you do?
Unless the new fund house offers something different, it would be wise to postpone buying into it. “There is no need to be a guinea pig. Wait for at least six months to a year to see how the fund is progressing. There are enough existing funds to look at in the interim,” says Sanjay Kumar Maheshka, managing director, Prabhudas Lilladher Fund Advisors Pvt. Ltd.
Graphic by Yogesh Kumar/mint