Midcap, Smallcap Index Funds from ABSL & Nippon India?

Why this kolaveri to launch index funds by AMCs? Is it worth the cost and effort, given the poor interest among investors and "advisors"?

Herding in sheep representative of herding in AMCs to launch index funds

Published: February 27, 2020 at 11:10 am

Last Updated on

In Feb 2020, Aditya Birla Sun Life AMC has filed three draft scheme information documents (SID) with SEBI: for a midcap index fund, smallcap index fund and Nifty 50 equal-weight index fund. In Jan 2020, Nippon India made three such filings: midcap index fund, small cap index fund and Nifty IT ETF.  Why are AMCs chasing after passive AUM when they have active funds in the same category? Is it worth the effort?

These draft SID filings do not always pan out as an NFO launch. Motilal Oswal filed for a Nifty LaregeMidcap 250 Index (which would have been quite interesting) but choose to convert that into an active fund and launched four index fund at the same time – Direct Investors Prefer Motilal Oswal Small Cap Index Fund from their four Index NFOs

Links to draft SID filings with SEBI

Naturally, AMCs have only one aim in mind – AUM. The only reason they launch NFO after NFO is to get that nice spike in profits that a new fund offers. The ideal NFO is one that results in at least 1000 Crores of AUM during the NFO period and this is possible only if there are significant commissions involved.

As reported before – Are Indian Investors ready to choose Index mutual funds or ETFs? – even for index funds, AMCs require distributors (at least in the NFO period) to generate AUM momentum.

Even with distributor help, AMCs can only expect tens of Crores from each index fund NFO (much less, if it is an ETF as there are no regular plans here!). So why do it? Sustainable AUM growth in index funds is possible only via direct plans and only if the expense ratio is enticing low. Ultimately it will become the battle of expenses.

Even after seven years of direct plans. AMCs have failed to create a “direct following” among investors with exceptions like Quantum and PPFAS. They cannot rely on distributors to bring in passive AUM beyond the launch.  This can grow only if AMCs advertise it, the direct portals recommend it, but even here past performance, star ratings and peer comparison influence investors.

As of now, the popularity of an index fund boils down to sheer luck – favourable market conditions. So why are so many AMCs filing for passive funds? “We would like to offer investors a choice” will not wash. A supermarket offers choice. A fund house should offer a clear investment objective.

Naturally, they are trying to exhaust every possibility in the SEBI categorization rules. Why do you think you see so many thematic (ESG!) funds? This is because of a clause in the rules

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

Only one scheme per category would be permitted, except,  i.Index Funds/ ETFs replicating/ tracking different indices; ii.Fund of Funds having different underlying schemes; and iii.Sectoral/ thematic funds investing in different sectors/ themes

ABSL has filed for an ESG fund! So has DSP! Can one not think of any other investment theme? Hard to react any other way than “copycats”!

So the goal would now be to launch as many index funds, as many thematic funds and as many fund-of-funds as possible as there are no limits on the number of funds in these categories.  The lack of uniqueness in the scheme mandates compels us to ask,  Is this a case of AMC FOMO (fear of missing out)?

It would take investors of incredible maturity to continue investing in passive funds especially in the midcap and smallcap segments where past performance is just about everything!

Perhaps hybrid index funds or factors-based index funds like NIfty 100 Low Vol 30 could be a better selling point, but in terms of AUM, it would almost be foolish to bet that they would do any better.

This spate of passive funds can only be seen as AMC competing for a piece of what is already a thin slice of AUM. Is it worth the trouble? Will it be able to justify the huge promotional costs of launching each fund (paid tweets, articles etc)? The big challenge for AMCs would be conviction. They cannot justify a passive fund in their portfolio when they have active funds in the same category.

DSP tried to do this during their DSP Nifty 50 Index Fund & DSP Nifty Next 50 Index Fund launch in Feb 2019. In its NFO campaign DSP has admitted that index funds are relevant today for two reasons:

Introduction of SEBI re categorization which has confined the universe for active large cap fund managers & Introduction of TRI indices

The promotional pamphlet also points out to the over 4% reduction in average alpha from 2000-2009 to 2010-2018 when three-year and five year rolling return periods are considered. This is shooting themselves in the foot!

AMCs will have to recognise the need to “directly” interact with investors. Showcase their overall investment mandate and how each product serves that mandate. This is the only way to sell at least passive mutual funds when information spreads so easily! It would also help if each product is unique in its basket of funds.

Without this, long-term profits in the passive universe would be hard to come by and the launch AUM would literally be a flash in the pan. I cannot but wonder if Benchmark Mutual Fund that exclusively dealt in ETFs would have done better if launched now. Goldman Sachs acquired it in 2011 (and added one index fund – NIfty 500), sold to Reliance (2015) who in turn sold to Nippon India (2019).

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps