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And You Thought Size Didn't Matter!

There are plenty of people who tend to be influenced by the AMC's size. Or at least it appears so when one sees the attention that is being paid to which AMC is number one

My friend LM prefers to invest his money with the fund company that is number one. That is, he keeps all his money in funds run by the AMC which is managing the largest amount of money. In recent times, the poor fellow has had to constantly shift all his investments from one AMC to another. After years of UTI's dominance, Reliance Mutual Fund became the largest AMC in January. Next month Prudential-ICICI became the largest. In March, it's back to Reliance. Poor LM is having a tough time shifting his money around as the crown passes from one AMC to another.
In fact, he's now thinking of a radical new strategy to decide which fund to invest in. He's not completely sure yet, but instead of choosing funds based on the AMC's size, he might start choosing them based on their investment track record! Now this is a revolutionary idea and frankly, I've advised him to proceed with utmost caution. However, LM has almost run out of patience and if the number one AMC changes just one more time, he's determined to switch to a performance-based methodology from his current mine-is-bigger-than-yours methodology.
Obviously, any reader of this magazine knows that the above story is a joke. But while you and I know it's a joke it appears that many people working in the fund industry (and the financial media) wouldn't know that. Or at least it appears so when one sees the attention that is being paid to which AMC is number one. I guess there's an impression around that there are plenty of investors around who actually behave like LM. But perhaps I'm wrong. Perhaps there are people who-even if they don't actually switch investments based on the number one position-tend to be influenced by the hype.
The logic could be that an AMC that is larger became larger because it was managed investors' friends better. If this is the case then this logic is severely flawed. There could be many reasons for an AMC's large size, the most prominent example being the one on this month's cover story. This is true at the other end of the scale as well where Quantum is the smallest as well as youngest AMC. The nature of an AMC's assets can also vary. Because of its history, UTI probably has a lot of 'old money' from a large number of small investors. ICICI Prudential has a considerably higher proportion of short-term debt investments compared to Reliance, which has more of new equity money. This has all sorts of business implications for those who run these AMCs. For example, equity is more profitable than debt and investors with large investments are probably more profitable (but also more fickle) than small investors.
However, none of this should matters to investors. The sizes of fund companies should matter to you only if you own one. Actually, if an amusing story doing the rounds in Mumbai is true, then this could also matter to you if your brother owns one. Apparently, when Reliance Mutual-an Anil Ambani business-became number one in January and launched an advertising campaign trumpeting the fact, his brother shifted a huge sum of money into ICICI Prudential to specifically ensure that another AMC became number one. While it is a fact that the AMC's brief number one status resulted entirely from a brief (and huge) increase in size of its liquid fund, this is just a rumour and in any case, sibling rivalry should matter even less to fund investors than AMC size.