Specialists v/s generalists: Mutual fund industry braces for a new battle

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Niche players are making their presence felt in the Indian mutual fund industry. These ‘specialists’ are giving ‘general’ mutual funds a run for their money. Asset Management Companies like Quant Mutual Fund, Navi Mutual Fund, and NJ Mutual Fund have their distinct strategy that differentiates them from the existing fund houses in the market. These mutual fund houses are deploying Artificial Intelligence, technology, and new age strategies to roll out new schemes. With Sebi allowing fintechs and broking houses to launch AMCs, we are likely to see similar innovations in the coming days.

Some fund houses like Quantum Mutual Fund and PPFAS Mutual Fund have been following a distinct strategy for years now. They also have their fan base that are very loyal to them. Both fund houses are known for their flagship schemes- Quantum Long xx Fund and Parag Parikh Flexi Cap Fund – that adhere to value investing principles. PPFAS further cemented that distinct identity by investing in overseas stocks and running a tight portfolio. Quantum now runs a few debt schemes, passive schemes, golf scheme, but it’s value scheme continues to be its mainstay.

Some mutual funds like Axis Mutual Fund and Mirae Mutual Fund also carved out separate identities even though they offer more diverse offerings. Both these fund houses are known to pay a ‘reasonable price’ for growth. The strategy helped them to offer great returns at a time when most mutual funds were worried about the valuations.

Investors rewarded them by pouring in more money. Axis MF was cornering most inflows into the industry until recently.

Move over generalists, it’s the turn of specialists to catch the imagination of mutual fund investors and advisors. Gone are the days when mutual fund houses competed with each other to complete the bouquet of offerings. These days 50 schemes are frowned upon by investors. They seem to prefer fund houses that focus on a certain style of investment or focus on a scheme.

Navi Mutual Fund, a new entrant to the mutual fund industry, is focused on low-cost index schemes. The fund house has launched 5 index schemes in the last six months. Navi is the latest venture by Sachin Bansal (formerly co-founder of Flipkart) and Ankit Agarwal (formerly a banker with Deutsche Bank and Bank of America) and was launched in December, 2018.

The fund house has captured investors’ attention by charging the lowest expenses in their schemes. Navi MF launched the cheapest Nifty Index Fund and the cheapest Nifty Next 50 Fund. It’s Nifty Midcap 150 Index Fund is the cheapest in its category with total expense ratio (TER) of 0.12%. Navi’s US Total Stock Market Fund of Fund (FoF) has the lowest expense ratio in the industry of 0.06%. Navi Mutual Fund has launched 10 schemes so far and is about to enter the metaverse and AI segment with its new scheme.

Another new entrant in the mutual fund space is NJ Mutual Fund, a fund house totally run by factors. Factor investing is an investment approach that involves targeting specific drivers of return across asset classes like – Value, Momentum, Low Volatility etc. Factor investing sits between traditional active investing and passive investing combining features of both to offer a well differentiated and distinct investment approach. At the execution stage, there is no human discretion which eliminates all human bias.

One would wonder why have an entire fund house dedicated to factor funds when traditional AMCs are also offering a few such products. “Factor investing emerges from the confluence of investment logic and data science. And while traditional active investors do have the former, the skill sets, organizational framework and mindset needed to put in place the latter is often absent. Factor investing cannot be undertaken as a side activity and needs sustained effort and dedicated focus to be successful. It needs specialized teams with very specific skill sets combining database experts, programmers, data scientists and financial data experts. The organisation structure needed to support rules based active investing also differs from that of a traditional active manager quite comprehensively. So while it is possible for a traditional active manager to launch a factor fund, establishing an ecosystem to nurture and sustain it is another matter altogether,” says Rajiv Shastri, Director and CEO, NJ Mutual Fund.

Even though NJ Mutual Fund has launched only one scheme till now, the NFO of that scheme has been extremely successful. NJ Balanced Advantage Fund collected over Rs 5,200 crore across more than 2.17 lakh folios during the NFO making it the largest maiden NFO in the history of the Indian MF industry.

PPFAS Mutual Fund, a fund house that has been around for a decade now, had only one scheme. Sounds odd in an industry where the most established fund houses have more than 50 schemes each. PPFAS believes in the principles of value investing and its scheme.

“The thought process while launching our flagship scheme- Parag Parikh Flexi Cap Fund was- to simplify and not complicate the investment process for the investor. We saw a huge need to do this as we saw fund houses having several schemes without much differentiation among them. In addition, there was a lot of overlap in investments between them. Only the scheme names were different. As investment professionals, it was confusing and complicated for us to differentiate and choose between so many different schemes that we thought there was a need to simplify this part,” says Neil Parag Parikh, Chairman and Chief Executive Officer, PPFAS MF.

The idea of PPFAS Flexi Cap Fund gives investors the advantage of all investment opportunities- across geographies, across market caps and across sectors. “A true ‘go- anywhere’ fund would be an apt solution,” Neil Parikh says. He adds that having only one scheme doesn’t give you the possibility of ‘survivorship bias’, where you can hide behind the performance of other schemes. However, their strategy of total focus on one fund has really paid off. PPFAS Flexi Cap Fund has been among the toppers in various market phases.

Some newer AMCs have also started to prove their worth with exceptional returns and outperformance in difficult market situations. Quant Mutual Fund is one such example. The fund house relies on the multidimensional, rule-based strategy to run all its schemes. Many of their schemes were toppers in almost all equity fund categories. They give the credit of this performance to their investment framework derived from quant Global Research’s (qGR’s) multi-dimensional research. VLRT is a combination of four elements, namely: Valuation Analytics, Liquidity Analytics, Risk Appetite Analytics and Time strategy.

“Our investment strategies are very scalable and Quant Mutual Fund is a data driven firm. We quantify every investment opportunity and aim to remain unbiased with regards to an investment opportunity. Quantification of data, remaining unbiased and being agnostic towards sector, style, market cap, etc. definitely gives us an edge. Also, we have developed a suite of Predictive Analytics tools that have the ability to quantify market sentiments. These tools are vital to our decision-making process and aid in identification of inflection points; thus, help us in staying ahead of the curve,” says Sandeep Tandon, CEO, Quant Mutual Fund.

Sure, mutual fund industry participants are not giving too much importance to these new ‘specialists’. Most of them say it is too early to form an opinion on these new players. At a time when burning money to acquire customers was not part of the popular conversation, many mutual fund houses, especially foreigners, lost money and shut shop. Benchmark, a fund house that focused on index based investing, made money and sold the company to a foreign fund house. In that sense the mutual fund industry has already seen such disruptions.

That raises a question: can investors bank on specialists to manage the money? Many industry observers say mutual fund business is all about AUM and many niche players may change track for larger AUM in the coming years. Very few would have the conviction to stick to their unique selling points.

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