With mutual funds houses getting listed, investors can buy their stock, invest in schemes, or both

Over the years, retail investors have warmed up to mutual funds as a financial saving and investment tool. Helped by this trend, asset management companies, or AMCs, have achieved scale, size, and profits. Over the past few months, MF companies have come to public markets and listed their shares. Today, investors can buy shares of pure-play fund firms like Reliance Nippon Life Asset Management and HDFC AMC, which had a successful IPO.

Over the next few months, there are talks of other AMCs, like UTI, tapping the market. If MFs as a product are doing well and helping firms clock profits, should investors directly buy shares of the MF firms, or the funds or both? DNA Money spoke with industry experts to arrive at the answers.

Funds v/s AMCs
The growth opportunity in the Indian MF space is quite big. Investors can buy MFs, which are a portfolio that may consist of stocks, debt (fixed income), gold etc. The investment required in funds can be as low as Rs 100-500 if you are doing a systematic investment plan. On the other hand, shares of fund firms allow you to take an exposure of a fund company. The minimum investment amount will be the share price of that fund company. While MFs go up and down based on the portfolio constituents, AMCs make money from the management fee charged to investors. Once an investment is made in a fund, it keeps yielding the management fee for the AMC so long as the investor does not redeem it.

You may make a loss in your fund investment, but the AMC’s management fee is always paid. Does this mean buying an AMC’s share is a better idea? Amar Pandit, founder and chief happiness officer, HappynessFactory.in explained, “Assume you have Rs 1 lakh to invest and you have to choose between the shares of HDFC AMC and the MFs schemes of the AMC. If you choose to invest in the shares of the AMC, you are betting your investment on one share. Whereas when you invest in a MF, your investment is diversified across 25-40 different shares or so.”

Clearly, the success of your investment now depends on the performance of a wide variety of businesses, not just one particular business. “Although one can expect that the performance of HDFC AMC shares would largely depend on the performance of its schemes, which in turn depends on the performance of the underlying shares in their portfolios, there are other factors specific to the AMC’s business that can affect the AMC’s share price movements,” said Pandit. So for those investors who are keen on having the shares of HDFC AMC, the indirect route, that is, investing in a fund that has the AMC’s share in its portfolio could be a safer bet, he added.

Factors at play
The MF industry has a huge scope for expansion as the industry assets still constitute 10% of its GDP, whereas the global average of MF/GDP ratio stands at around 55%. Undoubtedly, direct investment in AMC stocks holds good potential.

Manish Kothari, director and head of mutual funds at Paisabazaar.com said investors must understand that AMCs are companies, and individual schemes are their products. Hence, comparing them would be like comparing apples with oranges. “The growth potential of an AMC stock would depend on its profitability, penetration and other market-related factors. Whereas returns of its individual schemes would depend on their portfolio selection, fund management style and relevance of their investment mandates in the contemporary market,” he explained.
Investing in individual funds would also allow investors to benefit from portfolio diversification, the key advantage of investing in MFs over direct investment in stocks. “As a result, even in a scenario where a listed AMC fails to generate value for its shareholders, due to its poor fundamentals or other market-related reasons, its individual fund scheme(s) might continue to generate excellent returns, due to their diversified portfolios and investment mandates,” pointed out Kothari.

With the listing of HDFC AMC, India will have two listed AMCs, the other one being Reliance Nippon Life Asset Management, whose stock has grown by 1%, since its IPO, from Rs 252 to Rs 254, on Friday. There are about 40 unlisted AMCs, many of which have top performing funds in their product list.
Diversified approach

If a listed AMC holds excellent growth potential for its shareholders, many of these well performing MF schemes, too, would hold the AMC stock in their portfolio and benefit their unit holders from its growth.
AMCs have minted money in the last few years, thanks to the rally in the equity market. But a downturn in equity markets will impact AMCs and MFs. Due to this cyclicality, an AMC and its equity funds are not immune to a bear phase.

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According to Kaustubh Belapurkar, director-fund research, Morningstar India, buying stocks of AMCs gives you exposure to a high growth industry. “Indian investors have taken to MFs investing in a big way and this trend is expected to continue as penetration is still very low. But valuations for these stocks are on the higher side,” he cautioned. Funds are the best option for investors to get a pure diversified exposure to a variety of business, he added.

Source: DNA Money