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Should you invest in schemes from smaller mutual fund houses?

There are 44 AMCs in the industry and the smallest AMCs also have certain AUM, which means investors do bet on their schemes.

, ET Online|
Updated: Sep 16, 2019, 12.07 PM IST
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It is a theory that is gaining currency among mutual fund investors: avoid smaller funds houses with modest assets under management or AUM; stick to larger fund houses, only they can survive a huge setback in troubled times. Some mutual fund advisors have started speaking about the benefits of sticking to larger fund houses after many mutual fund houses were hit by a series of defaults and downgrades in the last year. Even otherwise, it was an unwritten rule to choose larger AMCs while investing in debt mutual funds. The fiascos only reinforced the rule. However, slowly it is becoming a standard rule even while investing in equity mutual fund schemes.

Mutual fund advisors say that there are no clear cut answers to this question. However, there are certain factors investors need to keep in mind when they choose schemes from certain AMCs.

There are 44 AMCs in the industry and the smallest AMCs also have certain AUM, which means investors do bet on their schemes. However, mutual fund advisors say that investors should avoid new AMCs. “Among the smaller AMCs are those which are new to the market, say which have been there for less than five years. These AMCs should be avoided because they don’t have a track record to back them,” says Shifali Satsangee, Founder, Funds Ve'daa.

Satsangee adds that this approach is similar to how you choose new schemes. “We always tell investors to not invest in new fund offers because they don’t have a credible track record. Consistency is one of the major parameters to figure out how good or bad your scheme or AMC is,” says Satsangee.

The mutual fund space is flooded with new schemes from these upcoming fund houses. But fund advisors say that investors should stay away from them. Some mutual fund advisors believe that the track record of the fund management team is also important to note. They also say that it should not be the only consideration. “The fund management team is really important for a fund house and for investors. But a fund manager may manage two different schemes differently. One fund manager might be very aggressive, but when she moves to a conservative fund house, she might act differently. So, these things shouldn’t be looked at in isolation,” says Harsh Jain, COO, Groww.in.

There have been AMCs which have outperformed their larger in size peers in recent years, but advisors are sceptical about them. “While there are some AMCs which have done really well, there is some risk in AMCs with very small AUMs. We don’t know how they would perform when they have double the money to deploy. Definitely there are AMCs which surpass such risks but we have to wait and watch,” says Shifali Satsangee.

Mutual fund advisors say that the vision of the AMC is also very important. “If you believe in value investing, a Quantum Mutual Fund might be a good option for you. But just looking at their performance in a specific time frame won’t be the best way to judge that fund house,” says Pankaj Gera, a certified financial planner, based in Delhi.

In the end, advisors say that there a lot of technical factors that they look at to conclude whether an AMC is worth betting on. However, retail investors might find this process taxing. It is better to go for the top 10 AMCs if you are a direct investor. If you have a mutual fund advisor, he/she might tell you which smaller AMC is good for a particular sector or scheme.

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