HDFC AMC IPO – A Quality Asset

  • Date 24th July; IPO Opens 25-27th July at Rs. 1095-1100
  • Valuations: P/E 32.3 times TTM, P/B 10.7 times (Post IPO)
  • Mid Cap: Rs. 23,300 cr. Mkt cap
  • Industry – Asset Management
  • SUBSCRIBE for the IPO

Summary

  • Overview: HDFC AMC is the #2 player among AMCs by AUM and #1 by profits. HDFC operates as a JV between HDFC and Standard Life Investments. HDFC is one of India’s leading finance companies. Revenues and profit for FY18 were Rs. 1,867 cr. and Rs. 722 cr. HDFC revenues, EBITDA and PAT grew at 19.9%, 19.2% and 19.1% CAGR in 5 years. The Indian mutual fund industry is expected to grow at a CAGR of 20% between FY18 and FY22, due to buoyant capital markets, and a shift from physical to financial assets. Valuations in terms of P/E are 32.3 times, P/B at 10.7 times and market cap/AUM at 8% are high. However we have seen that in emerging sectors/ industries the excelling high quality players can command very high valuations. So a good track record, robust financial performance, sectoral tailwinds, reputed management team and good promoter identity makes this IPO attractive.
  • Risks: 1) High Valuations 2) Regulatory risks 3) Competition can impact margins 4) Macro concerns
  • Opinion: Investors can SUBSCRIBE to this IPO with a 3 year perspective.

Here is a note on HDFC Asset Management Company (HDFC) IPO.

IPO highlights

  • The IPO opens: 25-27th July 2018 with the Price band: Rs. 1095-1100 per share.
  • Shares offered to public number 2.54 crore. The FV of each is Rs. 5 and market Lot is 13.
  • The IPO is of Rs. 2,800 cr. for 12% equity by current promoters HDFC Ltd. and Standard Life Investments UK, with no dilution. HDFC Ltd. and Standard Life are selling 4.05% and 7.96% of shares.
  • The Promoter group (HDFC and Standard Life) own 95% in HDFC which will fall to 83% post-IPO, ie. 53% and 30% in resp. HDFC is a well-known Indian NBFC and is the holding company into financing the purchase or construction of houses, commercial real estate, etc. in India.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
  • The unofficial/ grey market premium for this IPO is Rs. 370-380/share. This is a positive.

Introduction to HDFC AMC

  • HDFC AMC is a leading Indian asset management firm into Mutual Funds and PMS Advisory. It is a JV between HDFC Ltd and Standard Life Investments. HDFC Ltd. is a leading Indian housing finance firm.
  • Revenues and profit were Rs. 1,867 cr. and Rs. 722 cr. for FY18. It has 1,010 employees out of which 58% are in sales and 29% are in client services. It had an AUM of Rs. 2,92,000 cr. in FY18. It is the most profitable AMC in India. It is the largest AMC in India in terms of equity-oriented assets and has consistently been among the top 2 AMCs in India in terms of total average AUM since Aug 2008.
  • The equity-oriented and non-equity-oriented assets are Rs. 1,50,000 cr. and Rs. 1,42,273 cr. resp. of total AUM. HDFC AUM has grown at 25.5% CAGR over FY13-18. Their proportion of equity-oriented AUM to total AUM is 51.3%, higher than the industry average of 43.2%. As equity schemes have a higher fee structure compared to non-equity schemes, the product mix helps achieve higher profits.
  • The market share of AUM is 13.7% and of active equity AUM is16.8% among AMCs see Fig 1c.
  • HDFC offers a large suite of savings and investment products across asset classes, which provide income and wealth creation opportunities to customers. In FY18, they offered 133 schemes classified as 27 equity-oriented schemes, 98 debt schemes (including 72 fixed maturity plans FMP), three liquid schemes, and 5 other schemes (including ETF schemes and funds of fund schemes).
  • This diversified product mix provides them with the flexibility to operate successfully across various market cycles, cater to a wide range of customers from individuals to institutions, address market fluctuations, reduce concentration risk in a particular asset class and work with diverse sets of distribution partners which helps them expand their reach.

jainmatrix investments, hdfc amc ipojainmatrix investments, hdfc amc ipoFig 1(a) – HDFC AUM split -June 2018 (b) HDFC Segment revenues c) Market share /Note – QAAUM is Quarterly Average AUM /Click to enlarge image view. 

  • HDFC also provides portfolio management and segregated account services, including discretionary, non-discretionary and advisory services, to high networth individuals (HNIs), family offices, domestic corporates, trusts, provident funds and domestic and global institutions. As of FY18, they managed AUM of Rs. 6,474 cr. as part of their PMS and segregated accounts services’ business.
  • HDFC had a total of Live Accounts of 81 lakh as of FY18, and their Monthly Average AUM from individuals was 62.2% of their total MAAUM, compared to the industry average of 51.4%.
  • A key element of their strategy is to promote a customer-centric culture that spans across all aspects of their business. As of FY18, they served customers in over 200 cities through their pan-India network of 209 branches (and a Dubai office) and service centers of their registrar and transfer agent, which is supported by a network of 65,000 empaneled distribution partners across India, consisting of independent financial advisors, national distributors and banks.
  • Leadership is Deepak Parekh (Chairman), Keki Mistry (Non-Exec Director), Milind Barve (MD), Prashant Jain (CIO) and Piyush Surana (CFO).

Promoter – HDFC Ltd and Group – Snapshot and Financials

  • The HDFC group is a known financial conglomerate in India, with presence in housing finance, banking, life and non-life insurance, asset management, real estate funds and education finance. Listed companies of the group include HDFC Ltd., HDFC Bank, HDFC Standard Life Insurance Co. and GRUH Finance. HDFC Ltd is the holding company and is also engaged in financing the purchase or construction of residential houses and commercial real estate.
  • Income and PAT has grown at 14.1% and 19.5% CAGR resp. over 5 years.

jainmatrix investments, hdfc amc ipoFig 2 – HDFC Financials

  • HDFC Ltd. share price gained 19.5% CAGR over the last 5 years and CMP is Rs 1,970.
  • HDFC Ltd. has visible signs of pick-up in demand for mortgage loan led by improving affordability, attractive incentive from PMAY scheme and introduction of RERA which augurs well for sustained growth in loan book for HDFC over the next 3-5 years. Further, the performance of its various financial business subsidiaries/associates has improved substantially over the last few quarters.
  • The key risks are 1) Aggressive competition among the HFCs 2) Unstable interest rate environment.
  • HDFC has a market cap of Rs 3,33,106 cr. to be ranked #6 in India.
  • HDFC is a prestigious group with good ethics. It has rewarded shareholders and performed well over decades. The listed subsidiaries of HDFC Ltd. have generally retained these qualities.

News, Updates and Strategies of HDFC AMC

  • The average cost of acquisition of equity shares for HDFC ltd. has been Rs 19.53 over 2000-18 and for Standard Life Investments it is Rs 15.01 over same period.
  • HDFC’s business strategy is as follows: 1) Maintain strong investment performance 2) Expand their reach and distribution channels 3) Enhancement of product portfolio. 4) Invest in digital platforms to establish leadership in the growing digital space.
  • HDFC has grown by acquisition, taking over Morgan Stanley AMC (2014) and Zurich India MF (2003).
  • HDFC AMC sold its shares worth almost Rs 150 cr. to distributors in April 2018 before the upcoming IPO. These shares were offered to 190 distributors and advisers at Rs. 1,050/share. But SEBI in July 2018 directed HDFC to scrap this placement and to return the money it had collected with a 12% interest. These shares were then acquired by PE firm KKR paving the clearances for the IPO. Prior to the share allotment, HDFC had sought approval for a special quota for distributors in its IPO, but SEBI rejected the proposal then because it was against a separate quota for distributors.

MF Industry Outlook in India

  • The economy has seen financial events such as demonetization, RERA implementation, GST and a crackdown on black money and shell companies. All these have rekindled interest in financial assets as compared to real estate and gold which were the most popular earlier.
  • Penetration of equities remains low, with only 2% of population having a demat or equity /MF ownership. Gold & real estate hold a large proportion of savings but have generated weak returns.
  • The regulations and disclosures around MFs have ensured good traceability and audit trails. SEBI has promoted MFs as good entry level equity and debt products, and MF asset growth has been good.
  • The MF industry’s AUM grew at a CAGR of 24.9% from Rs. 7 lakh cr. in FY13 to Rs. 21.4 lakh cr. as of Mar 2018, supported by strong investor inflows of Rs. 9 lakh cr. FY17 & FY18 have been remarkable for the industry, attracting around 68% of the Rs. 9 lakh cr. net inflow, with equities leading the charge. Equity-oriented funds (including balanced and excluding ETFs) attracted 60% of the total net inflows in FY17 & FY18. Supported by these strong inflows, growing participation from individual investors and rising equities, the assets surged 42.3% in FY17 and 21.7% in FY18. During FY18, the fresh investments in MFs grew by 22.2% to Rs. 3.9 lakh cr. in the FY 2018.
  • The growth in the AUM has been supported by a favorable macro environment, the rising of capital markets, foreign fund inflows as well as growing investor awareness.
  • Today there are 41 AMCs operating comprising 7 promoted by PSB’s, 2 by financial institutions, 25 by private sector and 7 by foreign players (including JV’s). The Indian MF industry is concentrated with the 10 large AMCs having 80% of the industry AUM. ICICI Prudential AMC, HDFC, Reliance, Birla Sun Life and SBI Funds are the 5 largest with 57% of AUM.
  • The MF industry is expected to grow at a CAGR of 20% between FY18-22, with the AUM expected to grow to Rs. 45 lakh cr. by Mar 2022. Growth rates are expected to be higher in FY19 due to buoyant capital markets and increase in retail participation, after which it may taper down. Stock broking firms too perform very well when markets are in a bullish phase.
  • Global asset management firms have struggled in India as independent MF firms. Many sold out and exited. They have had a better success rate on partnering with Indian firms as the MF JV promoter.
  • India’s MF penetration (AUM to GDP) at 12.8% is much lower than the world average of 62% and also lower than developed economies like US (101%), France (76%), Canada (65%) and UK (57%) and even emerging economies like Brazil (59%) and South Africa (49%). This is expected to grow fast.

Financials of HDFC

  • HDFC revenues, EBITDA and PAT grew at 19.9%, 19.2% and 19.1% CAGR in 5 years, see Fig 3.
  • Margins for 5 years are flat but high double digits due to good exposure to equity assets. Given the high revenue growth, flat margin is a good achievement. Absolute profits have grown fast.
  • HDFC had a RoE of 33.4% in FY18 and RoCE of 49.1%. The return ratios are high and excellent.
  • HDFC paid dividends of Rs. 405 cr. in FY18 (including DDT). The dividend payout ratio is high at 56%.
  • HDFC has been Free Cash Flow positive in the last 5 years. This is good CF management, see Fig 4.
  • 76% of the pre IPO equity shares have been pledged by a non-promoter shareholder. None of the shares held by the promoter or promoter group have been pledged.
  • The issue has been priced at Rs. 1,100 share which translates to a P/E of 32.3 times. The market cap/AUM is 8%. This is aggressive and makes the issue expensive.

jainmatrix investments, hdfc amc ipoFig 3 – Financials, Fig 4 – HDFC Cash Flow jainmatrix investments, hdfc amc ipo

Benchmarking

We benchmark HDFC against other Indian and global AMCs. See Exhibit 5. Only Reliance Nippon is a pure AMC, other Indian firms have NBFC and broking businesses. US firms are for comparison.

  • The asking PE and P/B is high. HDFC has moderate 3 year sales and PAT growth. The NBFC business segments of Indian firms has allowed faster growth.
  • The Debt is low, but again for non AMC business, the debt is necessary so it not comparable.
  • The margins are at the higher end amongst most peers from the industry. This is a positive.
  • The return ratios historically also have been very high and robust among comparable peers.
  • Note – The USA companies data is for CY2017, Exchange rate is Rs/$ of Rs 68.

jainmatrix investments, hdfc amc ipo Exhibit 5 – Benchmarking

Positives for HDFC and the IPO

  • HDFC has a market leadership in the Indian MF industry of #2 on AUM and #1 on equity AUM. Their market share of total AUM was 13.7% and of actively managed equity-oriented AUM was 16.8%.
  • HDFC has a trusted brand and strong parentage of HDFC group. The holding company and the 3 other listed group firms have done well on the stock markets. HDFC Standard Life Insurance Co was the most recent to list in Nov 2017. It has also done well post listing, up 65% on IPO price.
  • HDFC MFs have performed well with a solid approach, philosophy and risk management.
  • HDFC has a superior and diversified product mix distributed through a multi-channel distribution network. Their product mix enables them to operate through various market cycles, cater to specific customer requirements and reduce concentration risk. Strong distribution relationships also ensure the commitment of the channels for new launches and investor support and confidence.
  • HDFC has consistently had assets and profit growth.
  • HDFC has an experienced and stable management & investment teams.

Risks and Negatives for HDFC and the IPO

  • The valuations are high in terms of P/E, P/B and market cap/AUM.
  • HDFC had overextended its distributor benefits pre-IPO, and was ordered by SEBI to avoid a conflict of interest and revoke the distributor allotment of shares. HDFC realizes the importance of distributors, but needs to take care to not cross the legal or market accepted limits.
  • The global macros are looking cloudy. Trade war tensions between USA – China can escalate. A diplomatic conflict with Iran is playing out. Oil prices are trending higher. Brexit threatens the UK economy. Europe and the Euro are looking weak with poor economic outcomes for the region. In this situation a sharp deterioration on any of these parameters can affect Indian investment climate.
  • AMCs are closely regulated by SEBI and is subject to changes or tightening of norms. For example in July 2014, the holding period for long-term capital gains tax on debt MFs was increased from 12 to 36 months. It is possible that regulatory changes can affect their business in future.
  • SEBI in Oct 2017 issued a circular to categorize and rationalize the MF schemes. MFs are classified into 5 groups, i.e., equity, debt, hybrid, solution oriented and other schemes. These 5 groups have 36 categories of schemes, and only 1 scheme per category is permitted by a MF. This has resulted in many MF schemes being merged, renamed and repurposed in the industry. HDFC has complied with the SEBI changes, but the rationalization may have a adverse impact on their brands and business.
  • Competition from existing and new MFs could reduce their market share or put pressure the fees.
  • The tax on Long term Capital Gains from equity was introduced in budget 2018 in Feb at 10%, from zero earlier. This caused a correction in markets, particularly the mid and small cap stocks.
  • Competition to the MF industry is from alternatives like the PMS industry, AIF/ Hedge Funds, Private equity markets and direct equity advisory services. Many of these are the next steps for MF investors after they have started their investment journey with MFs.
  • HDFC has defocused from PMS and other segments and appears to focus on Mutual Funds.

Overall Opinion and Recommendation

  • In India there is a massive trend of financialization of assets, a move away from physical / guaranteed assets like real estate, gold and FDs, towards equity and debt.
  • The MF industry is witnessing a massive growth with total AUM’s growing rapidly in the last 10 years. The number of new investors and their portfolios has grown significantly from retail investors. In fact the domestic driven MF industry has emerged as a foil to the FII investors in India.
  • The #2 player by AUM, HDFC AMC is well managed financially, has a great brand, high margins and return ratios, low CAPEX and cost structure.
  • Valuations look high in terms of PE 32.3 times, P/B 10.7 times and market cap/AUM at 8%. However we have seen that in emerging sectors/ industries the excelling high quality players can command very high valuations (think Avenue Supermarts in Retail and group firm GRUH Finance in rural home loans). HDFC certainly faces high competition, but can pull ahead and become #1 by AUM in the next few years. So a good track record, robust financial performance, sectoral tailwinds, reputed management team and strong promoter identity makes this IPO attractive.
  • Opinion: Investors can SUBSCRIBE to this IPO.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or known financial interests in HDFC AMC. He has a stake in HDFC Bank. Punit Jain may apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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A Superior Investing Process – Do a DIP SIP

Did you know that the DIP SIP is the most efficient way to invest in the stock market?

We at JainMatrix Investments recommend investors to invest in equities in a Direct Equity – DIP SIP mode. The equity markets have fallen sharply this year, and this is a good time to invest. Let us explain this process.

What is a SIP?

A Systematic Investment Plan or SIP is a smart mode for investing money which allows you to invest a certain pre-determined amount at regular intervals (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments where the saving habit becomes a routine. The SIP approach can be used for any investment vehicle, such as FDs, MFs, direct equity, etc.

Why Equity investments?

Historically investments in equity stocks have given higher returns amongst all the other asset classes if investment was done with discipline and a long term time horizon. See an assets map where we present a number of asset classes and the Risk-Return trade off, Fig 1.

Fig 1 – Comparison of Asset Classes, JainMatrix Investments

Fig 1 – Comparison of Asset Classes (click on image to expand)

What are the benefits of an equity SIP?

  1. Ride the Volatile Equity class and reduce Risk with Rupee Cost Averaging
  2. SIP can be started with very small amount of money, and increased at a later date
  3. Timing the market is not necessary. But gains are best when markets are low.
  4. Long term financial goals can be aligned with SIP
  5. Disciplined approach towards Investment helps in controlling the emotions
  6. Investments get aligned with income flow and it becomes a regular habit

The JainMatrix Investments Model Portfolios

JainMatrix Investments launched its Large Cap Model Portfolio in Dec 2012 and its Mid & Small Cap Model Portfolio in Feb 2013. These two portfolios are chosen from over a 100 stocks that we have researched over the years. The main reason for two separate model portfolios is to offer simple investment choices, and to align with the risk appetite of investors.

  • The Large Cap Model Portfolio consists of 7 stock picks from 7 different sectors. The firms chosen are identified as high potential large caps with good fundamentals. The minimum investment period is 2 years. The objective is to outperform the Sensex/ Nifty by 5-10%.
  • The 7 stock picks from the Mid & Small Cap Model Portfolio are from 3-4 high potential sectors. These firms have very good growth potential irrespective of mid, small or micro size. The minimum investment period is 1 year. The objective is massive out-performance of Mid/Small cap Indices.

DIP SIP and equity MF SIP compared

Now that you have understood the equity SIP mode of investment, it is imperative to compare DIP SIP – investing directly in equity with equity Mutual Funds.

1 – Expense Ratios

Investments in equity Mutual Funds are expensive in terms of the expense ratio cost incurred to the investor. Expense ratio states how much you pay a MF in percentage term every year to manage your money. This includes the fund management fee, agent commissions, registrar fees, and selling and promoting expenses. The Expense Ratio that is disclosed every March and September as a percentage of the funds net assets. As you grow your investment portfolio over the long-term, a high expense ratio will eat into your returns through power of compounding. The expense ratio of debt MF’s is typically in the range of 0-1% whereas it is in the range of 1-3% for equity MF’s. See Fig 1.

Exhibit 2 – Expense ratio of MFs, JainMatrix Investments

Exhibit 2 – Expense ratio of MFs (Source: Finalaya.com)

In comparison to this, the JainMatrix Investment Service has a fixed/ flat annual charge.

2 – Performance

Now let’s have a look at various index returns, top performing large, mid & small cap MF’s and the performance of JainMatrix Investments model portfolios.

Top 10 Large Cap MFs over last 3 years

JainMatrix Investments

Fig 3 – The top 10 Large Cap MFs over 3 years (Source Value Research)

The best performing large cap MF over a 3 year period is Birla Sun Life Frontlife Equity Fund which has given investors a 13.7% simple annual returns. In the same period the SENSEX has given investors a simple annual return of 7.27% and JainMatrix Investments Large Cap Model Portfolio has given a simple annual return of 13.3%. Let us understand this graphically in Fig 4.

JainMatrix Investments

Fig 4 – The Sensex, MF and JainMatrix LC Portfolios (Source Value Research)

Top 5 Mid Cap and Small Cap MFs over last 3 years

JainMatrix Investments

Exhibit 5 – Return and expense ratio of top 5 Mid and Small Cap MFs (Source Value Research)

  • The best performing Mid-Cap MF over a 3 year period is UTI Mid Cap Fund with a 28.08% simple annual returns. In this period, the S&P BSE Mid-Cap gave returns of 17.14%.
  • The best performing Small-Cap MF over a 3 year period SBI Small & Midcap Fund gave 33.23% simple annual returns. In this period the S&P BSE Small Cap gave a return of 18.22%
  • The JainMatrix Mid & Small Cap portfolio gave a simple annual return of 47%. See Fig 6.
JainMatrix Investments

Fig 6 – The Indices, MF and JainMatrix MSC returns (Source Value Research)

3 – Control

Investors in MFs hand over the investment performance to the portfolio management team of the MF. They can now decide only to buy, hold or exit. However in the case of the JM Model Portfolios, investors retain control over the purchases as the investments are in their own trading/ demat accounts. This offers additional flexibility to investors for both entry and exits.

4 – Liquidity

Liquidity is the investors ability to encash in the case of urgent need for money. MF’s can be closed ended MFs that will be locked in until maturity thereby removing chances of liquidity during the investment term. Thus if an investor wants the money immediately, then he/she would have to pay an exit load for the same which is again 1-3% of the invested amount. ELSS MFs are locked in for 3 years. Direct equity is very liquid as within 2-3 days the stock can be sold and the cash credited into the linked bank account. However from a tax perspective, the treatment is the same for direct equity and equity MFs. Long term capital gains kick in after 1 year of investing.

How to execute a DIP SIP?

Checklist for a Direct Market SIP:

  • You can use your current Online Trading account/ broker relationship for the DIP SIP. If you have to choose among your broker options, choose the one with lower brokerage or better ease of use.
  • Decide on the 5-7 stocks you will invest in.
  • Decide on the amount you will invest every month – here I would suggest you fix an amount in the range of Rs 5,000 to 50,000 and keep up this amount every month. Thumb rules here can be 10% of your take home salary or 50% of monthly savings.
  • Create a small calculation excel for helping you decide the actual number of shares to be bought. See section – Start Investing.
  • Decide a date for investing. If you are salaried, perhaps 2nd or 3rd every month is a good date as it is right after you have received your salary. Or any other convenient date. Keep a reminder for this.

Choose Your Stocks

This is an important step. My key principles in choosing the stocks are:

  • For a high stability low risk portfolio, choose large liquid blue chips.  They should be Nifty/ Sensex stocks. You do not want too much volatility in this investment.
  • For an aggressive higher risk portfolio, choose mid & small cap stocks with high potential.

Subscribe to JainMatrix Investments Investment Service to receive proven, high performing Model Portfolios

Start Investing

  • You are now on the day you are starting your DIP SIP, within trading hours.
  • Choose your DIP SIP portfolio of stocks. Lets say you chose the top 5 shares by mkt cap.
  • Lets say you have chosen the amount Rs. 30,000 to be invested every month for your DIP SIP.
  • Create a small excel – which can help you calculate the number of shares right now. See fig 7.
JainMatrix Investments

Fig 7 – Tool for DIP SIP purchase

  • Open the excel, do the calculation; then buy the DIP SIP through your broking account.
  • Your DIP SIP can be done in 10 minutes every month. 

Start your DIP SIP today. Subscribe to the JainMatrix – Investment Service to get our top performing Model Portfolios  and recommendations and you are ready to go.

Click here to subscribeLINK

Contact us on LINK

See our Track Record LINK 

Happy Investing!!!!!

JAINMATRIX KNOWLEDGE BASE 

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DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

How many mutual funds should I hold?

——————————————————————————————————————————– I came across the question on an online forum, and wanted to answer this …..

How many mutual funds should I hold?

Let me try to answer your question from several perspectives.

Answer from perspective 1: A mutual fund is a collection of direct stock investments with an overall theme and structure. The theme usually is

  • Large Cap/ Mid/ Small equity, or
  • a sector equity, or
  • a debt or bond fund, or
  • a mix of above.

The structure will be a diversified number of stocks/ bonds with an upper limit for any single investment. It can also limit sector concentration, etc. There are also norms of Risk and Churn which are to be followed. Having noted this, I would argue that if we understand the perspective of the investor, just one MF would be sufficient. This choice would incorporate the risk profile of the person –

  • Conservative (debt, bond, ETF or safe Large Cap equity MF)
  • Aggressive (Mid Cap, Small Cap or sector fund) and
  • Balanced (diversified equity plus debt).

There may also be a mutual fund house performance risk, so at best a second fund may be added from another MF house.

Answer from perspective 2:

For equity investments, None.

I am personally of the view that once a new investor has experienced equity MF investing for a few years (or even earlier), he is mature enough to both –

  1. do some of his own research and
  2. realize some of the negatives of MFs.

And he may be ready for Direct Equity investments on his own. Let me elaborate. MFs are good instruments for the beginner investor. But there are a couple of negatives of MFs

  1. Annual management expense are fixed costs of up to 2.5% of portfolio.
  2. Variable performance of MFs. Many have underperformed the benchmarks over extended periods of time.
  3. No success incentives. There is no element of success profit share with investor, so there is no incentive to outperform the indices, except a higher position on the rating charts.
  4. Mis-selling of MFs by intermediaries can cause high MF churn, not allowing investors to wait for gains.

In this scenario the investor may realize that investing directly in equity with some guidance is the lowest cost and maximum gain scenario, for long-term investment gains. This is what we do at JainMatrix Investments.

  • The investor can use his own demat and trading account for share purchases
  • The investment service recommends investments into direct equity and monitors them to ensure performance
  • After the fixed costs of the Investment service, and the demat and share purchase costs, the investor gets to keep his entire portfolio profits, effectively maximizing gains
  • Critical here is the quality of the investment service, which they should ensure

JainMatrix Investments has a great track record, check for yourself. LINK

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com