Fintechs, distributors and PMS firms enter mutual fund fray: Here's what investors should track

view original post

© Venkatasubramanian K Fintechs, distributors and PMS firms enter mutual fund fray: Here’s what investors should track

Investors have been just seen a wave of new fund offers (NFOs). Now, there is a rush for mutual fund licenses, evident from many new firms entering the fray recently. Fintechs, PMS firms, distributors and even discount broking firms have applied are looking to become mutual fund houses.

While it is advisable to go with existing schemes that have a long track-record, new fund houses may come up with innovative products or investment processes in selecting stocks, which deserve some consideration.

Here are a few things to keep in mind if you decide to go with a scheme from a new fund house.

Does the management have a track record?

Check whether a fund house is run by a team of investment professionals who have experience in managing assets.

For example, White Oak’s mutual fund foray is led by its founder Prashant Khemka. He was the chief investment officer at Goldman Sachs Asset Management (GSAM) and spent 17 years there. Aashish Somaiyaa, who will be the chief executive officer of this new fund house, has been in the mutual fund industry for 21 years.

Index or exchange-traded funds (ETF) seem to be the new flavor with some newbies starting off with them. And to entice investors, newer fund houses may even lower costs drastically. For instance, the Navi Nifty 50 Index Fund that was rolled out in June 2021 remains the cheapest index fund in the industry. Passive schemes mimic indices and don’t carry fund manager risk, though the tracking error may need to be gauged over time.

Swarup Mohanty, chief executive officer of Mirae MF, says that several of the new fund houses could follow a completely different business plan, which would allow them not only to compete, but even challenge large and established fund houses.

Is there a well-defined investment process?

Fund houses with strong investment processes manage to do well and build a good long-term track record. How does an investment process help? There can be instances where a fund manager’s own bias towards a particular stock or sector can hamper the performance of the scheme. But, if there are strong processes in place, it can help in bringing down the impact on the scheme’s performance.

“A strong investment process can also help the fund house to keep its performance intact despite fund manager exits,” says Amol Joshi, founder of Plan Rupee Investment Services.

Recently, the newly-launched fund house Samco MF disclosed its investment process. The fund house will use what it calls the Hexashield Framework to identify investment ideas. So, each company would get tested on six parameters. These are reinvestment and growth stress tests, corporate governance and leadership stress tests, cash flow stress test, balance-sheet and debt stress test, competitiveness and pricing power stress tests and regulatory stress tests.

Joshi adds that it is also important for investors to monitor whether the fund house is sticking to its investment philosophy or deviating from it. Again, this gets validated over time, irrespective of how elaborate a new fund house is about its process at the time of launch. Especially, if it actively manages its funds.

Some of the new fund houses could even deviate from traditional investment processes and come up with their own ones.

For example, NJ Mutual Fund will use a combination of predefined rules or factors to select investment ideas, without a fund manager getting into the picture.

“Rule-based investing has been successful globally. Now, there is enough data in Indian markets to analyse and apply rule-based investing here. So, through this new way of investing, investors can diversify their investment portfolio,” says Rajiv Shastri, chief executive officer of NJ MF.

“We are not new to managing assets. We have been running our PMS services for the last 11 years, offering both rule-based and factor-based products,” he adds.

Be cautious about new investment themes

Sometimes, new fund houses launch innovative schemes. Financial planners typically avoid such schemes and instead point towards existing funds that come with proven records.

“These new funds can be linked to an emerging investment theme, a new sector or asset class. But, unless such funds sit within the investors’ risk-profile, return expectations, or offer genuine diversification, investors should avoid such schemes,” says Anup Bhaiya, founder and managing director of Money Honey Financial Services.

“If investors want to try out such funds, it is advisable to first watch these schemes closely, let them build some track record and then invest a small part of their kitty in such funds. It is not advisable to include such a fund to your core portfolio; but it can be part of your satellite portfolio,” he adds.

Disclaimer: The views and investment tips by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decision.