It seems running an Asset Management Company (AMC) is a highly profitable business.

On the first day of listing, the HDFC Asset Management Company (AMC) made a debut on stock exchanges in style rallying a massive 65% at closing.

This wasn't a surprise considering that it was oversubscribed nearly 83 times.

(Image source: thebluediamondgallery.com)
Many mutual fund investors might conclude if the market has welcomed HDFC AMC in such a grand fashion, investing in HDFC Mutual Fund schemes could be equally rewarding too.

Believe it or not, you would be mistaken!

Let's see what factors coalesced to position the HDFC AMC as an attractive bet for investors…

The HDFC AMC diluted about 12% capital by offering shares worth Rs 2,800 crores. Two of AMC's major shareholders: HDFC Limited, and Standard Life Investments; diluted their stake. In other words, the AMC the issue was carried out solely for the benefit of shareholders. It was purely an Offer For Sales (OFS).

In a business where the minimum capital requirement is just 50 crore, the HDFC AMC's Networth is over Rs 2,000 crore.

Let's see what factors coalesced to HDFC Mutual Fund is the second-largest fund house (after ICICI Prudential Mutual Fund), with Average Assets Under Management to the tune of Rs 3.07 trillion as on June 30, 2018, as per the data published by Association of Mutual Funds in India (AMFI).

HDFC Mutual Fund is the largest franchise for equity-oriented schemes and quite popular among retail investors. Over 62% of the AMC's total AUM comes from retail investors.

The dividend distribution ratio of the AMC has been upwards of 50% for the last two consecutive fiscals. In other words, the AMC has been distributing more than half the profit it makes every year.

In addition, the AMC has a strong brand recall and expects to benefit immensely from the shift in the investment preferences of Indians (post-demonetisation).

More people are willing to invest in mutual funds, and specifically in equity-oriented mutual funds through Systematic Investment Plan (SIPs). And HDFC Mutual Fund is expected to be a major beneficiary of this trend.

The fund house has a healthy operating profit margin and generates a Return-on-Equity (RoE) of over 30%.

As there's just one more listed AMC, apart from the HDFC AMC, investors have limited options. So whoever wants a share in the asset management business may be compelled to look at HDFC AMC.

In a nutshell, HDFC AMC is highly profitable, has a good pedigree, and is a strong player in a growing industry.

That's the secret of its success.

But what's good for shareholders, may not necessarily good for mutual fund investors. In fact, there has been enough evidence in the past where schemes of the mutual fund houses were doing enviously well, but the fund house wasn't profitable. A case in point is Fidelity Mutual Fund.

HDFC Mutual Fund initially grew through acquisitions and through its strong distribution network later. The strong across-the-board performance was its strength once and this has further facilitated its growth.  

Since HDFC Mutual Fund is a retail-centric and equity-dominant fund house, let's look at the performance of its equity oriented schemes.

Have HDFC Mutual Fund schemes lost their charm?

	Return in %
Scheme Name	6 Months	1 Year	3 Years	5 Years
Category: Aggressive Hybrid Fund
HDFC Hybrid Equity Fund(G)	-4.8	-1.7	4.6	27.5
Category: Balanced Advantage
HDFC Balanced Advantage Fund(G)	2.0	8.5	12.0	28.8
Category: Equity Linked Savings Scheme
HDFC Long Term Adv Fund(G)	3.3	9.2	14.3	32.2
HDFC TaxSaver(G)	-0.9	2.8	9.1	30.6
Category: Focused Fund
HDFC Focused 30 Fund(G)	-3.0	0.2	8.0	32.1
Category: Index Funds
HDFC Index Fund-NIFTY 50 Plan(G)	9.5	14.3	12.0	22.7
HDFC Index Fund-Sensex(G)	10.9	17.4	12.4	22.0
Category: Market Cap Fund
HDFC Equity Fund(G)	1.3	6.6	10.2	33.0
HDFC Growth Opp Fund Fund-Reg(G)	2.7	5.3	7.1	17.2
HDFC Mid-Cap Opportunities Fund(G)	4.1	8.6	15.1	53.0
HDFC Small Cap Fund-Reg(G)	2.8	20.4	21.3	42.8
HDFC Top 100 Fund(G)	2.7	6.7	10.6	28.9
Category: Sector Funds
HDFC Infrastructure Fund(G)	-13.3	-10.6	0.8	30.3
Category: Value Fund
HDFC Capital Builder Value Fund(G)	3.6	13.9	14.8	36.8
Category: Benchmark
NIFTY 50 - TRI	9.6	14.6	12.6	23.7
NIFTY 500 - TRI	6.6	12.0	13.3	28.8
S&P BSE 100 - TRI	8.5	13.1	13.0	25.4
S&P BSE Mid-Cap - TRI	0.5	6.2	15.1	45.2
S&P BSE SENSEX - TRI	11.1	17.9	12.8	23.1

Data as on August 06, 2018
Returns upto 1-year are absolute over 1 year are annualised
(Source: ACE MF)

Of late, a few schemes of the fund house have been faltering compared to their category peers.

At the same, scheme such as HDFC Capital Builder Value Fund, HDFC Equity Fund, HDFC Long Term Advantage Fund (Equity Linked Savings Scheme), HDFC Hybrid Equity Fund (erstwhile HDFC Premier Multi-Cap and HDFC Balanced Fund), HDFC Mid-Cap Opportunities Fund, and HDFC Small Cap Fund have rewarded their investors well for the risk taken.

So, the lesson to learn is not all schemes from HDFC Mutual Fund are worth your hard-earned money. Plus, you cannot base your investment decisions looking at the size of the fund and past performance – more so after SEBI’s mutual fund re-categorisation diktat.   

Further, you cannot invest in any of the HDFC Mutual Fund’s schemes blindly just because the fund house has a strong promoter, employs some star fund managers, and has offered good listing gains.

Remember that investing in the stock of HDFC AMC and the scheme of HDFC Mutual Funds are two different ball games.

If you wish to learn how to select winning mutual funds to earn efficient returns, download and read PersonalFN’s Money Simplified Guide - 10 Steps to Select Winning Mutual Funds

HDFC Mutual Fund, as a fund house, follows strong investment processes; but there have been times it has taken not-so-investor-friendly routes to grow its AUM. Brand recall and high profits might benefit its shareholders, but may not necessarily work for you as a mutual fund investor.

[Read: Is India’s Largest Fund House Taking Investors For Granted?]

[Also, read: Why HDFC Mutual Fund Killed HDFC Prudence and HDFC Balanced Fund]

It would be good if you are vigilant about the performance of the scheme you have invested in. You can do this by reviewing your mutual fund portfolio at least once a year.

You see, it is more important to invest in mutual fund schemes recognising your:

• Age;

• Risk profile;

• Investment objectives;

• Financial goals;

• Asset Allocation; and

• Investment time horizon before goals befall

Following the above, will make sure you invest and hold not only the best mutual fund schemes but the ones that are most suitable for you. 

Editor’s note:

Don’t you have the time, expertise, or both to select worthy mutual fund schemes?

You may opt for PersonalFN’s premium mutual fund research service, FundSelect.

PersonalFN's FundSelect has 15+ years of impeccable track record.

(Source: ACE MF, PersonalFN Research)
Performance as on March 28, 2018
Past performance is no guarantee of future results  

PersonalFN follows a SMART score matrix:

S – Systems and Processes

M– Market Cycle Performance

A -- Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

FundSelect has been based on one simple motto: “Be steady. Be alert. Be winning.”

Every month, our FundSelect service will provide you with an insightful and practical guidance on equity funds and debt schemes – the ones to buy, hold or sell, thus assisting you in creating the ultimate portfolio that has the potential to beat the market.  Subscribe to FundSelect today!

Happy Investing!

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