 "Look beyond size to build MF portfolio")
Small is not considered so beautiful by mutual fund investors. The country's top 10 MF houses still manage nearly 80 per cent of the sector's total of assets under management. The bottom 20 manage a mere three per cent. The gap is likely to widen in the coming years as investors flock to established fund houses and brands with top-of-mind recall.
Investors often overlook the scores of schemes from smaller fund houses that have built an excellent performance record and proved their mettle in tough times. Chances are you have heard of a HDFC Top 200 but not of Quantum Long Term Equity. Or, heard of an ICICI Prudential Midcap Fund but not a Motilal Oswal MOSt Focused Midcap 30 Fund. Then, there are entities such as BNP Paribas and Mirae Asset which are small here but have a large presence abroad.
If you stick to schemes from large fund houses, you could miss good funds that could add value to your portfolio. There are a dozen four-star and five-star rated equity schemes from the bottom 20 fund houses, according to Value Research. Almost all of these funds have beaten their benchmark and category returns for a three-year and five-year period. Add 40-odd four-star and five-star debt funds from these fund houses. Seven fund houses have all their equity schemes beating the benchmarks for a three-year period. In fact, three -BNP Paribas MF, Mirae Asset MF and Quantum MF - have all their equity schemes beating the benchmarks for both three-year and five-year periods.
"There is no data to support the idea that schemes from large fund houses do well or that those from smaller fund houses do not," said Manoj Nagpal, chief executive (CEO), Outlook Asia Capital. "Size is not a determinant of performance. All it does is give investors an emotional or psychological comfort."
Experts believe investment decisions should be based on the record of a scheme, the fund house's investment philosophy and pedigree of its fund managers, rather than the size of a fund house. "Look at how much the scheme is managing. If the amount is Rs 100 crore or more, investors need not worry. The only exception is for mid-cap and small-cap funds, where a smaller size might actually work to the fund's advantage," said Vidya Bala, head of MF research at Fundsindia.com.
"For me, the brand has limited value. All MFs are regulated by Sebi (Securities and Exchange Board of India) in the same manner. So, what does it matter if Infosys is owned by, say, HDFC or BNP Paribas or someone else? It should be the quality of the portfolio that should be given the prime importance," said Hemant Rustagi, CEO, WiseInvest Advisors.
According to sector observers, the smaller funds have been in the forefront of innovation. For example, Quantum MF is the only fund house that follows a direct model for all its schemes and does not employ the services of a distributor to sell these. Similarly, PPFAS MF has only one scheme in its portfolio, PPFAS Long Term Value Fund, which invests in international companies, besides Indian entities. The company's senior management has invested a sizable corpus in the fund. Edelweiss' Absolute Return Fund uses a derivatives strategy to hedge against volatility and is the only scheme to be benchmarked to an MIP index.
Investing in a smaller fund has other advantages, too. Smaller schemes are supposed to be more nimble-footed. "This is especially the case for a mid-cap fund, since a fund might not be able to find enough opportunities if the corpus it manages is too large," says Rustagi. Adds Bala: "Many small fund houses have fewer schemes in their portfolio, which means the chances of duplication of themes in your portfolio is minimal."
One reason could be herd mentality. The other, more important one, is distributor push. "Distributors typically recommend funds depending on its size or brand name. Only a few distributors recommend funds because these are innovative or because the scheme is built around a different idea," said Vikaas Sachdeva, CEO, Edelweiss MF. According to Jimmy Patel, CEO, Quantum MF, the larger fund houses know how to leverage the distribution network to their advantage by paying huge commissions. "The higher the commission, the more inclined the distributor will be to push the schemes to investors."
That said, investors should not forget the advantages that come with a large fund house. For example, these typically have a more stable and larger fund management team. "In smaller fund houses, the life of a chief investment officer or equity head is three years. In larger funds, fund managers stick around for longer," says Nagpal. Unlike smaller fund houses, large funds have an in-house research team and a stronger, well-defined investment process.
The expense ratios for the smaller funds might also be higher. However, Bala feels investors need not worry if the fund has given superior returns vis-a-vis peers, since the returns are calculated after accounting for expenses.
Investors often overlook the scores of schemes from smaller fund houses that have built an excellent performance record and proved their mettle in tough times. Chances are you have heard of a HDFC Top 200 but not of Quantum Long Term Equity. Or, heard of an ICICI Prudential Midcap Fund but not a Motilal Oswal MOSt Focused Midcap 30 Fund. Then, there are entities such as BNP Paribas and Mirae Asset which are small here but have a large presence abroad.
If you stick to schemes from large fund houses, you could miss good funds that could add value to your portfolio. There are a dozen four-star and five-star rated equity schemes from the bottom 20 fund houses, according to Value Research. Almost all of these funds have beaten their benchmark and category returns for a three-year and five-year period. Add 40-odd four-star and five-star debt funds from these fund houses. Seven fund houses have all their equity schemes beating the benchmarks for a three-year period. In fact, three -BNP Paribas MF, Mirae Asset MF and Quantum MF - have all their equity schemes beating the benchmarks for both three-year and five-year periods.
"There is no data to support the idea that schemes from large fund houses do well or that those from smaller fund houses do not," said Manoj Nagpal, chief executive (CEO), Outlook Asia Capital. "Size is not a determinant of performance. All it does is give investors an emotional or psychological comfort."
Experts believe investment decisions should be based on the record of a scheme, the fund house's investment philosophy and pedigree of its fund managers, rather than the size of a fund house. "Look at how much the scheme is managing. If the amount is Rs 100 crore or more, investors need not worry. The only exception is for mid-cap and small-cap funds, where a smaller size might actually work to the fund's advantage," said Vidya Bala, head of MF research at Fundsindia.com.
"For me, the brand has limited value. All MFs are regulated by Sebi (Securities and Exchange Board of India) in the same manner. So, what does it matter if Infosys is owned by, say, HDFC or BNP Paribas or someone else? It should be the quality of the portfolio that should be given the prime importance," said Hemant Rustagi, CEO, WiseInvest Advisors.
According to sector observers, the smaller funds have been in the forefront of innovation. For example, Quantum MF is the only fund house that follows a direct model for all its schemes and does not employ the services of a distributor to sell these. Similarly, PPFAS MF has only one scheme in its portfolio, PPFAS Long Term Value Fund, which invests in international companies, besides Indian entities. The company's senior management has invested a sizable corpus in the fund. Edelweiss' Absolute Return Fund uses a derivatives strategy to hedge against volatility and is the only scheme to be benchmarked to an MIP index.
Investing in a smaller fund has other advantages, too. Smaller schemes are supposed to be more nimble-footed. "This is especially the case for a mid-cap fund, since a fund might not be able to find enough opportunities if the corpus it manages is too large," says Rustagi. Adds Bala: "Many small fund houses have fewer schemes in their portfolio, which means the chances of duplication of themes in your portfolio is minimal."
One reason could be herd mentality. The other, more important one, is distributor push. "Distributors typically recommend funds depending on its size or brand name. Only a few distributors recommend funds because these are innovative or because the scheme is built around a different idea," said Vikaas Sachdeva, CEO, Edelweiss MF. According to Jimmy Patel, CEO, Quantum MF, the larger fund houses know how to leverage the distribution network to their advantage by paying huge commissions. "The higher the commission, the more inclined the distributor will be to push the schemes to investors."
That said, investors should not forget the advantages that come with a large fund house. For example, these typically have a more stable and larger fund management team. "In smaller fund houses, the life of a chief investment officer or equity head is three years. In larger funds, fund managers stick around for longer," says Nagpal. Unlike smaller fund houses, large funds have an in-house research team and a stronger, well-defined investment process.
The expense ratios for the smaller funds might also be higher. However, Bala feels investors need not worry if the fund has given superior returns vis-a-vis peers, since the returns are calculated after accounting for expenses.