Many people somehow end up with too many mutual fund schemes from the same fund house (AMC). Though it’s not an immediate risk, nevertheless can be a risk at some point in the future. Hence, it’s advisable to not have high exposure to one AMC. One should diversify among different fund houses.
I recently saw a mutual fund portfolio with SIP in 6 equity funds and 5 debt funds. But the investor had too many funds with one AMC. 4 equity funds (out of 6) and 4 debt funds (out of 5) belonged to the same AMC. On asking the reason for this, he said that it was convenient to deal with just one AMC.
So what is AMC concentration in your mutual fund portfolio?
When you have too many schemes in your portfolio of a single AMC OR when you have too much portfolio % invested in a single AMC. For example – You can have 6 funds with 5 belonging to one fund house. Or you can have 7 funds from 6 different AMCs but one fund makes 80% of your portfolio, so your exposure to that single AMC is 80%.
So why is it said to avoid excessive exposure to a single AMC?
In the case of debt funds, it’s really important to avoid over-exposure to a single fund house. As was seen in Franklin India’s debt fund crisis in 2020. Most AMCs may tell you that their different debt funds will follow SEBI’s debt fund category mandates and are different from one another. But in general, every AMC follows a core underlying philosophy. Like a sort of guiding principle. And that impacts all its funds. So some fund houses may take higher risks compared to others. Even in different categories of debt funds. Now when this guiding principle itself isn’t working in a particular market type, then all the funds of the AMC which are based on that core philosophy will underperform. So it’s necessary to have funds (of different categories) from different AMCs that have different philosophies and styles. It is called style blending in MF terms.
In the case of equity funds, if you hold several funds of a single AMC, there is a risk of excessive stock overlap. This happens regularly as many AMC’s have one fund manager handling or guiding several funds. So stock picks might be replicated across the board. Invest in schemes of different fund houses helps in having a number of unique styles and processes within your equity fund portfolio.
Few more points:
- Some fund managers do well and have a lot of fan following. These are like Star fund managers of the industry. So investors end up lapping up several funds that this so-called ‘star fund manager’ manages. But what if this star manager starts to underperform? In that case, several of your schemes will give poor returns. And what if this guy leaves the AMC and goes elsewhere? Think about it. Talking of ‘Stars’, I would like to remind you that do not blindly trust star ratings of mutual funds.
- What if the one AMC you have loads of funds from, sells out, or due to some regulatory or other issues like a scam, etc. goes bust? Imagine what would happen if you have a major part of your portfolio invested in that AMC’s funds? Think about it.
- In relation to the above point, bad news can make investors nervous. AMC-level bad news can push investors to start redeeming en mass. If that happens, there can be redemption risk. The AMC would then have to liquidate its investments at rock-bottom distress prices to honor its redemptions. Or it might just lock-in investment temporarily like Franklin India did in 2020 and made a mess of things (here).
One important thing, you may still be fine with under-diversification in equity funds, but I think it is perfectly fine to over-diversify to the side of caution in debt funds.
So if you were to ask me – Can I invest only in funds of one AMC I like?
My answer would be NO. Always diversify across different AMCs. Both in equity and debt funds. If you are a beginner, you may still pick 1-2 funds from the same house. But as your portfolio grows, ensure that you diversify category-wise as well as AMC-wise.
I hope you now understand why you should diversify your investments across different fund houses. So make sure to not have high exposure to one AMC.