Indian funds versus global Goliaths | Value Research Funds in India have comfortable headroom to grow without being obligated to follow the indices

Indian funds versus global Goliaths

Funds in India have comfortable headroom to grow without being obligated to follow the indices

Indian funds versus global Goliaths

Strong inflows into equity funds in the last five years has resulted in the emergence of jumbo funds - funds with assets over Rs 10,000 crore. We explore this trend in greater detail, along with the pros and cons of jumbo funds. This is our fourth story of the series.

If fund size is considered a constraining factor on performance globally, why is it not so in India? There have been instances when large global funds closed their gates to new fund flows for fear of losing out on performance race. For those, who did not follow this policy had to close down after growing too big for their boots.

Fund sizes may have grown manifold in India in the last five years but they are nowhere close to global sizes. So, they have not reached a stage where they need to control or stop fund flows.

The largest diversified equity funds in India manage an asset size of around Rs 18,000 crore to Rs 20,000 crore (the figure is Rs 30,000 crore for balanced funds). This comes to $2billion to $3 billion in assets. In US however, the fund sizes are as mammoth as $80 billion to $100 billion each. So, we have a long way to go!

The reason why the active-fund industry in the US has had so much trouble beating the benchmarks in recent years is that the equity-fund industry manages as much as $10 trillion in assets, accounting for over 37 per cent of the total US market capitalisation of $27 trillion.

When active fund managers have to deploy that much money, that leaves limited scope for cherry-picking stocks for their portfolios. The ultra-large funds, in order to keep up with benchmarks, inevitably end up becoming index-huggers. Therefore, a large size in the developed-market context forced the larger funds to turn into mini replicas of the market itself.

However, in India though, given the small proportion of household savings flowing into equities, equity mutual funds still manage only a small sliver of the listed market capitalisation. According to AMFI data, by end October 2017, the total assets managed by equity and equity-oriented funds in India amounted to about Rs 9.2 lakh crore.

This is barely 6 per cent of the Rs 131 lakh crore market capitalisation of all the listed stocks on the BSE/NSE. This number has risen from 2.4 per cent five years ago but is still not large enough to become an impediment for the fund industry.

One can argue that the full market capitalisation of Rs 131 lakh crore is not available as float for fund managers to dabble in as promoter holdings in the Indian market amount to about 47 per cent of the market capitalisation. But even adjusting for this, equity mutual funds today own only about 11.2 per cent of the free-float market capitalisation in India, allowing sufficient headroom for active stock picking without having to hug the indices.

This is part of a series of articles on jumbo funds. Find the other parts in this link.

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