New Mutual Fund AMCs coming. Should you rush to invest in their Schemes?

Recently, the mutual fund space saw two new entrants. One was Groww that acquired Indiabulls AMC’s portfolio while the other was NJ India, a pan-India distributor that is now entering into AMC space itself after selling MFs for years.

And this trend of new AMCs isn’t going to stop here. From what is known in the public domain, around 7-9 applications are already there with the regular SEBI to grant new mutual fund license in India.

The reason for this increased interest in starting an AMC is that a few months back, SEBI had relaxed the norms (details) that paved way for smaller entities (and fintech startups) to set up their mutual fund business. This in SEBI’s view will facilitate innovation and enhanced reach to more investors at a faster pace including tech-enabled solutions.

Given that in India, only about 2-3% of the population invests in equities, there definitely is a lot of scope and runway left to further increase retail participation in equity. And seemingly, more MF players will help increase the penetration of mutual funds further in India – a country which I feel really needs to grow and see why traditional insurance plans are useless as investments in the long term.

Currently, there are 40-50 AMCs operative in India (list). You never know that after 10-15 years, we may have 100 or even more AMCs here. But will it help the investors? The space is top-heavy as of now. That is, the top 10 AMCs hold more than 80% of the AUM in India (here is a link to AMC-wise AUM in India a few years back). So a little competition will indeed help. Also, it might help lead to further lowering of MF scheme expenses due to different AMCs competing for the same AUM wallet.

But will the new AMCs be able to make a dent in this pecking order when the existing bottom 35-40 AMCs couldn’t do?

You never know. They may. They may not.

I am sure in due course of time, smaller players who are unable to scale up profitably will merge or get bought out. So the number of players in the space will keep going up and down.

But all said and done, for existing mutual fund investors, what should they do when new fund houses (AMCs) starting launching their schemes in form of New Fund Offers (NFO)s in different mutual fund categories?

Should you rush to invest in new schemes of new AMCs?

I think there should be no hurry. Existing AMCs have established track records and have proven their worth (at least a few schemes of theirs) during the thick and thin. So you cannot ignore that. New players may offer plain-vanilla index funds or few actively managed schemes. Or they might come up with more exotic options (like target-date funds, rule-based funds, smart beta, factor-based funds, etc.) to woo the investors.

But it’s better to not be too adventurous. It is better to wait and watch.

You may still dip your toes with small amounts to see how things are. But the core of your mutual fund portfolio should still be with established fund houses for now. Let the new players prove their mettle and then, you can happily increase your allocations to them.

Think of it like buying a car. Most people would like to buy a car that is well proven or comes from a manufacturer that has proven its worth. Right? The same is the case with mutual funds and AMCs.

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