Guided Investing

A Maze called Mutual Funds

Category : Investing, Mutual Fund · by Jul 17th, 2022

There are more than 40 AMCs offering 1000+ funds. With the multiple options in each fund, total schemes are more than 7000. This is 3x more than the companies listed on National Stock Exchange. Investing in Mutual Fund was supposed to make things easy for investors. But we have come to a stage where more choice has added to chaos. What if we are able to simplify mutual fund investing for everyone. OK, for most of us. This is a short matrix of best AMCs to choose for each category:

This is neither a Fund nor AMC recommendation. There is nothing like ‘best’ mutual funds. Ever. This is the situation today. Performance, ranking, size and almost every other number under the sun will be different tomorrow.

How did we arrive at this? Read on. The SEBI circular on Categorization and Rationalization of Mutual Funds in Oct’17 has brought about good changes to scheme classification. For one, the mindless scheme overlap came to stop and the names of funds became little inline with the fund objectives. With that AMCs could have 5 types of funds:

  • Equity Schemes – Invest in equities. Further divided in 11 sub-categories on marketcap and/or sectors
  • Debt Schemes – Invest in debt securities. Further divided in 16 sub-categories on duration and/or risk
  • Hybrid Schemes – Combination of Equity and Debt in different proportion. 6 sub-categories here
  • Solution Oriented – Long Term with specific objective (Retirement/Children’s Fund etc.)
  • Others – Index Funds, ETFs, Fund of Funds – domestic and overseas, equity and debt

Most AMCs have presence in all categories. Some like ICICI have over 100 funds. Does one really need a portfolio of 100 funds (or even 10) is a discussion for another day. On the other hand, few like IIFL and PPFAS have so few that it could be counted with one hand. As on 30-Jun, this is the AUM distribution of major (and few minor) AMCs:

AMCDebtEquityHybridLiquid/ OvernightOtherSolution OrientedGrand Total
Grand Total7,34,14512,08,2564,54,4134,86,0905,64,13333,21734,80,254

As per SEBI classification, liquid and overnight funds are part of debt category. I have intentionally added this as a separate column to highlight couple of points. One, though it constitutes about 15% of the total industry AUM, it is after all “hot money”. Meaning, easy come and easy go. Second, this is primarily invested for very short periods and does not move the needle significantly either for investor’s return or to AMC’s bottomline. We are going to ignore liquid/overnight funds going forward.

Similarly, solution-oriented funds are just about 1% of the total AUM and fewer than half AMCs offer such products. For the sake of brevity, we are also going to ignore those.

The new structure with % AUM looks like:

Legend: Green indicates high and Red indicates low. Dark green being highest and dark red being lowest

Notice some AMCs are skewed heavily towards a category. We will delve deeper into the why and how of it. And also, if we can draw any meaningful inference for investing decisions.

I – Let us start with the most “researched” and sought-after Category – Equity Funds:

The top 4 highlighted AMCs have more than 80% of their AUM from equity funds. And they are also top performers in the respective sub-categories they are present. For more detailed research check this article

Franklin is an odd one here. In Apr’20 they decided to shut down 6 debt funds and had to return about 31K crore in those funds. If not for that, ratios would have been totally different today. Second and more important, none of its equity funds are in top quartile. Hence, we can safely ignore Franklin from this list.

Quantum MF is another odd one out – their flagship scheme is under-performing for quite some time. Since they don’t have any significant AUM in either debt or other category, equity AUM stands out. And unlike other AMCs, Quantum had not had product launch in a long time.

Next two – Quant and PGIM are also doing decently good in their respective categories. But have relatively short performance history with current management.

The bottom 8 are the worst performers in terms of investor return. But surprisingly, they have the largest share of equity AUM! (facepalm moment)

II – Category – Debt:

Unpopular view – objective of investing in debt is not to seek highest return but highest (or high enough) safety. If that is taken care of, returns come naturally. Those who seek out only highest return tend to regret when the tide turns (from recent example, Franklin debt investors can confirm).

This old tweet can come in handy

Even Birla MF has had few issues with its debt funds. Had written about it here and here

To be honest, other than top few AMCs, there is not much choice when it comes to investing in debt MF.

III – Category – Others:

This category has funds from very different hues and colours. We will look at few of them in detail:

Edelweiss – The 5 Bharat Bond ETFs and their respective FOFs together have about 59K Crore or 82% of AUM.

Motilal – Nasdaq 100 ETF, Nasdaq FOF and S&P500 (all overseas funds) are the major contributors at about 10K crore or 83% of AUM.

UTI / SBI – Nifty and Sensex Index funds and ETFs constitute about 90% of the AUM.

Nippon – CPSE ETF is the major chunk here. Nippon has the oldest running Index ETFs in India. As of now, they also have the best liquidity. Together they account for about 90% of AUM. Trivia – Benchmark MF started index ETFs in India. Was acquired by Goldman Sachs. This in turn, got sold to Reliance MF. And subsequent management change from Reliance MF to Nippon MF.

IV – Category – Hybrid:

I am not a fan of hybrid funds. One can achieve the same end result by using a combination of Equity and Debt funds. And at much lesser costs too. Hybrid funds charge upto 10x more than an equivalent equity/debt combination. They are essentially AMC’s cash cows. They also have the highest payout ratio for distributors. No wonder, these get sold the most by large national distributors and banks. And that might partly explain for the large AUM for this category.

Another unpopular opinion – most investors can live without a Hybrid Fund. And may do well without it.

To summarize, the data tells us:

  • In Hybrid category, top 5 AMCs have for 70% of category AUM
  • In Others category, top 5 AMCs have 75% of category AUM
  • In Debt category, top 5 AMCs have about 63% of category AUM
  • Little deviation In Equity category – top performing AMCs have major AUM from Equity funds but they are small vis-à-vis industry AUM.

Do we see Pareto Principle at work here? Yes, for most part. There are few nuances but more or less – Pareto seem to work.

All this is well and good but this is too much data. Can you summarize it for me?

If we take the top performing funds from each category, we get this short matrix of ‘go to’ AMC for each category. They are in no order and just presented alphabetically.

Like quality, performance too is highly subjective. And it can change significantly for the time period one selects. And will definitely will be different tomorrow. But this matrix should give you a decent starting point of filtering 1000+ funds to a handful. I will leave individual fund selection to the investor. As always, do consult your advisor and/or do your due diligence before investing.


(1) Comment

1 year ago · Reply

Good one and well researchrd.

Leave a Reply

Your email address will not be published. Required fields are marked *