The ₹39-trillion mutual fund industry has seen a lot of interest, of late, with entities such as fintechs, discount brokers and portfolio management service (PMS) firms vying for licences to operate funds.
Thus far, the track record of an MF scheme has been the USP of a fund house or fund manager; but now, innovative products as well as new approaches are drawing investors. So, here are some points to ponder upon when considering a new fund house:
MF distributors say investors may consider schemes of new fund houses, but should first check the track record of the fund managers, especially if the funds are going to be actively-managed.
“There is no issue with making some allocation with a new fund house, as long as the people running the fund house come with a strong track-record and experience in the fund management industry,” says Anup Bhaiya, founder and managing director of Money Honey Financial Services.
Of the fund houses that have already got Sebi’s in-principle approval to launch MF businesses, two are PMS providers Helios Capital and Old Bridge Capital, which are led by former star fundmanagers Samir Arora and Kenneth Andrade, respectively.
The founders of Helios, including Dave Williams and Karan Trehan, have a strong MF background. Williams was also a trustee of Alliance Capital MF, while Trehan was president and CEO of Alliance Capital International, where he set up asset management firms locally and distribution relationships globally.
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Bhaiya says that it is important for investors to wait and see how the MF team gets built, including fund managers, chief investment officers (CIO) and chief executive officers (CEO).
Rupesh Nagda, managing director of Family First Capital, says an analysis of the track-record of managing investor money can help gauge how the investment management team has performed in the past. For example, PMS firms have a track-record, which can be used to make some assessment.
Old Bridge Capital’s All Cap Fund has delivered negative returns (-8.6%) over a one-year period, according to data from HDFC Securities. The S&P BSE 500 Index has given 0.3% return s in the same period. Since inception on 30 August 2016, the fund has delivered a compounded annual growth rate (CAGR) of 14%. Over the same period, the BSE 500 Index has delivered 12% CAGR.
Helios Capital’s Helios India Rising Portfolio gave a negative 6.3% return in one-year period, according to data from PMSBazaar. In the same period, the Nifty 500 Index gave 0.09% returns. All returns are as of 31 January 2023.
Since inception (16 March 2020), the PMS scheme has delivered CAGR returns of 20% against 25% by the Nifty 500 Index. To be sure, Helios Capital has a much longer—nearly two decades of track-record—of managing Indian equity assets through long-short hedge fund strategies.
White Oak Capital is another PMS firm that recently launched MF operations. Its PMS, India Pioneers Equity, has delivered negative 6.1% returns in one-year period.
Since inception (9 April 2019), the strategy has delivered 15.7% CAGR returns, according to data from PMSBazaar. This is against 12% CAGR delivered by BSE 500 Index in the same period.
White Oak is backed by Prashant Khemka, who was former CEO and CIO of Goldman Sachs Asset Management in India. WhiteOak MF is headed by Aashish Somaiyaa, who is former CEO of Motilal Oswal MF, and has over two decades of experience in MF industry.
Apart from PMS providers, some of the new fund houses are focusing only on passive funds.
India’s largest broking house in terms of active clients, Zerodha, for instance, aims to disrupt the passive fund space with more “efficient” products.
Vishal Dhawan, founder of Plan Ahead Wealth Advisors, says many new fund houses may launch innovative solutions on the passive side, but investors should not consider such product offerings just because of their novelty.
“New fund houses would try to disrupt both on the cost and solutions side. Investors will have to take a very nuanced approach when considering such funds. They would need to see if there is anything truly unique, or is it just another ‘me-too’ investment strategy. In that case, the opportunity may have to wait till a track-record is built,” Dhawan says.
Flipkart co-founder Sachin Bansal-backed Navi MF has launched US Total Market Fund of Fund, which is India’s only fund investing in a Vanguard fund, the second largest asset manager in the world and a pioneer in passive investing.
Navi MF has also launched regular index funds such as Nifty 50 Index Fund and Nifty Next 50 Index Fund at the lowest expense ratios in the industry.
Nagda says even if it is a passive-only fund house, investors may want to wait and see how the fund house is executing its strategy. “Ensuring that tracking differences are within a narrow range is not as simple. It requires certain efficiency in executing transactions in the fund’s portfolio, so that the portfolio is able to reflect the index at all times,” he adds.
So, even when considering a passive scheme of a new fund house, track the index performance and the fund’s performance for a while to check for any wide deviation from the index it is tracking.
New fund houses may also come up with different investment processes. “Just because it is a new or different investment process, it doesn’t mean it would necessarily deliver outperformance,” points out Ravi Kumar TV, founder of Gaining Ground Investment Services.
Investment process or philosophy can make or break a fund house’s performance. important will be to check if the fund house is sticking to its investment philosophy, especially when the fund house is focusing on actively-managed schemes. Again, this can only get validated over time.
A well-defined investment process is important as it can help to keep in check fund manager’s own biases towards a particular stock or sector, which may hurt scheme performances in the long run. Also, a well laid out investment process helps the fund house keep the scheme performances intact, when there are fund manager exits.
While an existing investment track-record helps, it is important to remember that investors in a PMS or alternate investment funds are likely to have a higher risk-appetite than MF investors. “Can the new fund house manage both the risk and return expectations of MF investors? This is something one needs to watch out for,” Kumar adds.
Remember, investor returns in a PMS may differ from the strategy as all flows are not pooled into one scheme, as is the case with mutual funds. Stocks are held in clients’ individual demat accounts.
Experts say new or first-time investors are still better off with established firms.
“Running an MF also requires meeting several compliances, and putting in place several checks and balances to ensure smooth running of the business. Investors should look who are the promoters? Is there a good credible name behind the fund house?,” according to R. Balakrishnan, a former mutual fund CEO and financial industry veteran.