Several small- and mid-sized mutual funds have seen robust asset growth in the past year on the back of stand-out returns and retail flows.
Mirae Asset Mutual Fund, Edelweiss MF, Canara Robeco MF, PPFAS MF, PGIM MF and Quant MF have clocked an AUM growth of 15-222% in the past year against the industry average of 5.4%, latest quarterly data from the Association of Mutual Funds in India (AMFI) shows.
Mirae Asset and Canara Robeco have been around a lot longer than the rest of the AMCs and have built a consistent, longer-term track record, according to experts. Canara Robeco has been able to maintain its performance despite the recent churn in its investment team.
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Edelweiss has been able to create a differentiated product offering, especially through Bharat Bond ETFs, and has done reasonably well on the equity side. PPFAS has enjoyed a good run in the aftermath of the pandemic. PGIM has tried to rebuild itself with a new team after its separation with co-sponsor DHFL and showcase consistency in the performance of its equity schemes. Quant MF has delivered a strong performance over the past few years on a relatively much smaller AUM.
“We realised that the first five years were going to be like a startup phase and we were ready to grind it out by running a tight, lean ship. But our consistent track record, ability to take tough decisions and transparent communication helped us gain acceptance among investors and distributors post 2019,” said Neil Parikh, CEO, PPFAS MF, which struggled to mop up assets in the first five years after it entered the MF business.
“What’s interesting is the breakout growth in younger players, for all the talk of consolidation at the top. Despite the edge of large budgets and tied distribution, the market is becoming more meritocratic,” Radhika Gupta, chief executive of Edelweiss MF, said in a tweet last week, alluding to the growth of these AMCs in the past five years.
The asset growth of these AMCs shows that investors are now willing to look beyond the top AMCs in search of returns, and are no longer dependent solely on the recommendation of distributors. The growth also augurs well for newer players and those waiting to enter the MF business looking to wrest investor mindshare.
“Maybe about a decade ago, investors were largely reliant on distributors or advisors to tell them which funds to invest in. That’s not the case today and there’s a lot more awareness among investors, even about the smaller AMCs. The advent of direct investing and ease of online transactions have also helped. It takes time to build a brand but the pecking order which was rigidly followed earlier is no longer prevalent now,” said Vicky Mehta, an independent analyst who tracks MFs.
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The common thread among these fund houses is having schemes that have done well over longer time frames. For instance, Mirae Asset Emerging Bluechip Fund, the AMC’s flagship fund, has given 5-year annualised returns of 13.4% against the large- and mid-cap category average of 9.4%. Parag Parikh Flexi Cap Fund has returned 22.2% in the last three years against the category average of 15%. This is despite the beating taken by its international portfolio last year. Quant Active Fund, the AMC’s flagship scheme, has returned 37.2%, way ahead of the category average of 16.9% in the past three years.
“It is perfectly normal for inflows to come in when schemes perform because there is a tendency among investors to chase performance. Distributors feel more confident recommending these funds as any fund backed by a strong track record becomes that much easier to sell. Performance is often the single-largest contributor to building the fund house’s brand image,” said Mehta.
Sustaining the same pace of growth, however, may not be easy.
“The challenge for smaller AMCs will be to replicate the performance on a larger asset base. Because with a larger AUM, factors such as risk management, diversification and liquidity will become a lot more relevant. The ability to retain talent will also be important considering mutual funds are essentially a people-driven business,” said Dhaval Kapadia, director, portfolio specialist, Morningstar Investment Adviser India.
“There are many strategies which can be easily executed if the asset sizes are small, especially if it has to do with forming positions quickly, getting in and out of sectors quickly, or focusing on small cap stocks. It remains to be seen if the same strategies can be deployed successfully if the assets sizes become 2x or 3x. Many funds have been found wanting in this regard in the past,” said Mehta.