The HDFC Asset Management Co. Ltd stock closed 65% up on the first day of listing over its IPO price of ₹1,100 per share. Investors who sold on day one, saw ₹1 lakh investment turn to about ₹1.65 lakh over a 10-day period. HDFC AMC’s business is to offer its investment management service to investors—both retail and institutional. It’s performance track record as an asset manager is mixed. For example, investors into the best equity scheme over a one year period—HDFC Small Cap Direct Plan—have seen a one-year return of almost 22%. The worst equity scheme from HDFC AMC, HDFC Infrastructure fund, lost 11% in the same year. Look further back, the worst equity fund is still HDFC’s Infra fund, with an average annual return of about 8% over 10 years. The best equity fund, HDFC Mid-cap Opportunities, has given a huge 20% average annual return over 10 years. As asset managers begin to list on the stock market, HDFC is the second AMC to list, the first being Reliance Nippon Life Asset Management Ltd that listed in November 2017, the question investors are asking is this: should you invest in the schemes of a fund or in the stock of the fund itself?
Multiplier returns over the short term create a buzz and many of us get carried away by the noise forgetting the reason we invested in funds over direct equity. Dial back to mutual fund and retail investing basics to remember that we buy mutual funds because we do not have the ability to spend the time, money and effort required to choose individual stocks. We prefer to leave that job to experts who do this for a fee. The risk of putting all our money in a few stocks over holding a bunch of stocks through a mutual fund scheme is much higher.
But you can argue back that the same logic that prevents us from buying stocks should also prevent us from buying managed funds. There are over 521 equity funds in the market with varying performance histories. The return difference of two equity schemes within a fund house we saw above is huge, so is the difference in the investor experience across fund houses. A one-year best return in a large-cap fund (Axis Bluechip) was as high as 23% and the worst was just 2% (IDBI Top 100). The best fund turned your ₹1 lakh into ₹1.23 lakh, the worst gave you a return worse than a one-year bank deposit. If you have to choose a good fund, how is this any different than buying individual stocks?
One way to reduce your fund manager risk is to buy an index fund or an exchange-traded fund (ETF). These funds we know replicate the index and remove what is called the fund manager risk from your portfolio. A fund manager risk is the risk of the money expert making wrong calls. For example, in the large-cap category of equity funds, the worst fund over 10 years has turned a ₹1 lakh investment to just ₹1.2 lakh, a return much poorer than a safer bank deposit. This is fund manager risk—the chance that your scheme will do badly because of poor decisions made by the fund manager. But with risk comes return. If you happened to choose the best fund in terms of returns, your ₹1 lakh 10 years ago in a large-cap is now at ₹4.21 lakh today. To iron out this difference, investors who do not have the ability to choose a managed fund, go the index fund way. An index fund gives the market return, so you may not do as well nor do as badly due to a good or a bad fund manager.
Your choice is not between HDFC stock and its mutual fund. Your choice is between stock picking yourself or going the mutual fund route. And within funds, your choice is between index returns and managed fund returns. The two are very different investment strategies and the current buzz around returns on a fresh listed IPO should not derail your financial plans. If you have chosen the mutual fund way, do not allow the noise over short term IPO returns to distract you.
Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation.