Should You Entrust All Your Money To A Single AMC?

Are you the type of person who likes to go to a particular market and buy products for which they are famous, or do you normally go to a supermarket, mall or chain store where you can find everything under one roof? The latter option not only saves time but also the effort of going to different places. Obviously, each has its own pros and cons, which we eventually realise after some time. Similarly, in the world of finance, there are types of investors who prefer to buy stocks or mutual funds belonging to the same group or AMC, while other investors buy from different groups according to trends or suggestions. [EasyDNNnews:PaidContentStart]

A key question you might have while reading this article is whether having multiple funds from the same AMC – even if they are in different categories like large-cap, mid-cap and small-cap – increases your risk unnecessarily. Should you think about spreading your investments across different AMCs instead? Many investors prefer the simplicity of managing all their investments under one AMC. They trust the consistency and ease of overseeing their funds in a single place. On the other hand, some opt for diversification across various AMCs to spread risk and access different investment strategies. They appreciate the potential for higher returns and the flexibility of choice. 

The real question then arises: which approach is best for you as an investor? We have noticed that certain AMCs or fund houses lead or dominate their peers in terms of returns. For example, in the year 2019-20, Axis Mutual Fund was dominant across categories, as shown in the table below. Similarly, in 2020-21, Axis Mutual Fund and PGIM Mutual Fund dominated other funds in terms of returns. Moreover, in 2021-22, Quant Mutual Fund took the lead and dominated the other funds. Investors often chase higher returns by adding these dominant funds to their portfolios without conducting proper research. Furthermore, if anything goes against expectations, investors may have to book losses. 

Do you remember the Adani Group and Hindenburg case, where Adani Group’s stocks experienced a significant decline following a research report by Hindenburg? The reason for raking up this issue is that at that time, many fund houses had added Adani Group stocks to their portfolios. When Hindenburg released its research report, the stocks plummeted, causing a significant drop in share prices as well as a corresponding drop in the NAVs of the mutual funds holding these stocks. 

At that time, a total of 154 funds were exposed to Adani Group stocks, with 107 being passively managed (index funds and ETFs), and the remaining 47 funds being actively managed as of December 31, 2022. Among the actively managed funds, investments were concentrated in Adani Enterprises, Adani Total Gas and Adani Ports and Special Economic Zone among all the listed Adani Group companies. Quant Mutual Fund, Nippon India Mutual Fund, Tata Mutual Fund and UTI Mutual Fund had the highest exposures to Adani Group stocks. 

As noted, Quant Mutual Funds had the highest exposure to Adani Group stocks at that time. Suppose you had included large-cap, mid-cap and small-cap stocks from the same AMC Quant Fund thinking that you were diversifying well, the scene would have been quite different behind the stage. Surely, you would have faced significant challenges and experienced a massive reduction in your overall portfolio returns. You correctly diversified across categories but selected the same AMC, which may not have caused issues if you had chosen an AMC other than Quant Mutual Fund. 

Let’s analyse the decline in NAV following the research report published by Hindenburg on Adani Group stocks. At the same time, we will compare the performance of Quant Mutual Fund versus the SBI Mutual Fund during this period to understand the potential impact on portfolios that solely held Quant Mutual Funds compared to those diversified across different AMCs. The reason for comparing with SBI Mutual Funds is that it is the largest AMC in India based on total AUM size. 

Looking at the data above, Quant Mutual Funds was significantly impacted compared to SBI Mutual Fund. The reduction in NAV for Quant Mutual Funds is more pronounced across all categories compared to SBI Mutual Fund. In every category, SBI Mutual Fund has outperformed Quant Mutual Fund, with even the mid-cap category from SBI Fund delivering positive returns during this period. Currently, if you are holding mutual funds across categories but from the same mutual fund company in your portfolio, then you should definitely check the stocks in the fund’s portfolio. 

Consider the image alongside. Reliance Industries and HDFC Bank are part of all the funds compared with different categories from the same AMC, which is Quant Mutual Fund. Moreover, Jio Financial Services is part of three out of the four funds under comparison. If something goes against expectation with these stocks for any reason, whether due to financial mismanagement or geopolitical situations, the NAV of the funds will be impacted substantially, and reduction in gains in the overall portfolio and diversification benefits will get compromised. 

Let me clarify that the Securities and Exchange Board of India (SEBI) has guided fund houses regarding exposure in stocks across different categories. For instance, SEBI mandates that mid-cap funds allocate at least 65 per cent of their investments in mid-cap stocks. The remaining allocation can be made into large-cap stocks or mid-cap stocks based on fund managers’ strategies and analyses. 

Pitfalls of a Concentrated Portfolio in a Single AMC

1) Dependency on Star Fund Managers — Investing solely based on the reputation of a star fund manager within a single AMC can pose significant risks. While a talented manager can drive impressive returns, their departure from the AMC could disrupt your investment strategy. Investors may find it challenging to track and follow the manager to a new firm, and if they exit the fund management profession altogether, there’s no continuity plan in place. 

This highlights the importance of not overly relying on individual personalities but instead focusing on robust investment processes and strategies. As per the data presented alongside, Ankit Pande is the fund manager for various funds. Most probably, his strategy would exactly be more or less the same, and he might have chosen the same stocks for each category, as explained earlier. If he is the star fund manager for you and leaves Quant Mutual Fund, then you might be in trouble.

2) Risk of AMC Failure — Placing all your investments with a single AMC exposes you to heightened risks, particularly concerning the potential for the AMC’s failure. Instances of financial irregularities, scandals or mismanagement at the AMC level can have severe repercussions across all the schemes in which you are invested. For example, if the AMC faces allegations of financial misconduct or regulatory scrutiny, it could lead to significant losses. Sometimes, AMCs face abrupt redemptions after news breaks, forcing an AMC to put an embargo on redemptions. 

Such events highlight the critical importance of diversifying investments across multiple AMCs to mitigate the impact of any single AMC’s operational or financial challenges impacting your overall investment portfolio. Probably you have heard of the front-running case involving Quant Mutual Fund. Frontrunning happens when a person, usually an insider or a broker, makes a trade in advance based on privileged information. 

For example, if a broker knows that a big client is going to buy a large number of shares of a company and he also buys some shares in his personal account before the transaction is done, it is a case of front-running. SEBI’s surveillance system indicated a case of front-running by suspected entities that were privy to what Quant Mutual Fund was going to buy or sell. It is suspected that Quant Mutual Fund’s executives who knew the size and execution timing of the orders may have passed on confidential information regarding the impending trade order to suspected beneficiaries. 

The net asset value of four funds dropped by more than 1 percent from the previous day’s NAV after the news was out in public. The NAV of Quant Healthcare Fund decreased by 1.75 per cent, followed by Quant Commodities Fund, which went down by 1.54 per cent while Quant PSU Fund and Quant Active Fund declined by 1.37 per cent and 1.21 per cent, respectively. Following an investigation by the SEBI, investors of Quant Mutual Fund redeemed investments worth approximately ₹1,400 crore over three days. Furthermore, this event raised concerns among investors about whether to continue, start or stop their ongoing investments and SIPs. 

3) Concentration Risk — A concentrated portfolio within a single AMC increases concentration risk, whether due to holding an excessive number of schemes from that AMC or having a significant percentage of your portfolio invested there. For example, you might have six funds overall, five of which are from one AMC. Alternatively, you could spread your investments across seven funds from six different AMCs, yet one AMC constitutes 80 per cent of your portfolio, leading to substantial exposure. 

This concentration exposes your portfolio to heightened vulnerability from market volatility, regulatory changes or operational issues affecting the specific AMC. Diversifying investments across multiple AMCs mitigates these risks by distributing investments across diverse sectors, asset classes and geographical areas, thereby reducing the impact of adverse developments specific to any single AMC. 

4) Overlapping — When investing in equity funds, holding multiple funds from the same AMC can lead to excessive stock overlap. For instance, as highlighted earlier, Ankit Pande manages several funds at Quant Mutual Fund, potentially resulting in similar stock selections across different categories like large-cap, mid-cap and small-cap. This concentration increases vulnerability to adverse events affecting those specific stocks. In contrast, diversifying across different fund houses introduces a variety of unique investment styles and processes. 

For example, investing in funds managed by different AMCs like Nippon India, Tata and UTI, alongside Quant Mutual Fund, spreads the risk across diverse strategies and reduces dependence on any single fund manager’s decisions. This diversified approach not only mitigates overconcentration in specific stocks but also enhances portfolio resilience and performance by leveraging the strengths of multiple investment philosophies and market approaches. In short, as the adage about the basket and the eggs states, it’s always better to spread your investments across different AMCs. 

Conclusion
In conclusion, the importance of diversification across multiple AMCs cannot be overstated in today’s volatile financial landscape. Recent incidents, such as the Quant Mutual Fund front-running case and the Adani Group stock debacle, highlight the vulnerabilities of over-concentration in a single fund house. By spreading investments across different AMCs, investors not only mitigate the risk of specific AMCrelated issues but also gain exposure to a broader array of investment opportunities and strategies. This approach enhances portfolio resilience against market fluctuations, regulatory scrutiny and unforeseen events that may impact a particular fund house. 

It also allows for better risk management and potential for more consistent long-term returns. Therefore, while the choice between consolidation and diversification depends on individual preferences and risk tolerance, diversifying across multiple AMCs remains a prudent strategy to safeguard investments and pursue financial goals effectively. Furthermore, it is advisable not to add more than two funds from the same AMC in pursuit of higher returns, even if advisors suggest it. We can never predict future contingencies, including those involving our financial advisors. It’s always safer to prioritise capital preservation rather than aggressively chasing higher returns. 

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