HDFC Equity Mutual Fund: Perception And Reality

When you invest your hardearned money, carry out a reality check and do not get moved by perception 

Reality may not impact you but your perception about the reality will definitely affect you. Something similar is happening in the case of those investors who have invested in the funds managed by HDFC AMC, India’s largest asset management company (AMC) by asset under management (AUM). Most of the actively managed equity funds managed by the fund house have performed sub-par in the last one-year and three-year periods ending January 26, 2020, in its category. Not a single actively managed equity fund from the fund house is in the top quartile in terms of performance, in the last one year.


In fact, HDFC Small-Cap Fund has been the worst performing fund in the last one year in its category. This fund also has the dubious distinction of only those funds in its category that have generated negative returns in the past 12 months. Even some of their flagship funds such as HDFC Top 100, a large-cap dedicated fund managed by none other than Prashant Jain, CIO, HDFC AMC, has been in the bottom quartile in terms of performance. 

Some of the loyalists of this fund house will argue that a single year is too short a period to pass any judgement, especially for equity instruments that are for long term. Hence, we extended our study to a three-year period. Even in the three-year duration, the picture does not change much. Only single fund from the fund house is in the top quartile; however, relative performance of some of the funds looks better than one year. But from an investor investing experience, it does not matter much as they are still laggard in their category.



Perception and Distribution Channels Driving AUM

Despite such lacklustre performance, the AUM of the fund house is rising better than the industry average. It has increased from Rs 3.291 lakh crore at the end of December 2018 to Rs 3.689 lakh crore at the end of December 2019. They now command 13.9 per cent of the total domestic AUM against 14.4 per cent at the end of December 2018.

Its market share is catching up with the fund’s performance. Their market share has dropped by full 100 basis points in the last one quarter. It was 14.9 per cent at the end of September 2019. Even in terms of actively managed equity funds, the fund house remains a leader with market share of 15.6 per cent at the end of December 2019.

This is what perception does. HDFC AMC with star fund managers had one of the best performing funds a few years ago, which has led to the continued faith of investors in the funds managed by them. Nevertheless, reality reflects a different picture. Forget the top quartile; the funds by this AMC are struggling to find a place in the second quartile also. One of the reasons for such a tepid performance may be due to higher AUM of the funds. For example, HDFC Small-Cap Fund managed by Chirag Setalvad with AUM of Rs 9,232 crore at the end of December 2019 has the highest AUM in the small-cap category. Similarly, HDFC Mid-Cap Opportunities Fund has AUM of Rs 22,796 crore and also the highest AUM in its category.

Selective research shows that a large fund size has some disadvantages when it comes to creating alpha for their investors especially in case of small and mid-cap funds. Therefore many fund houses have a cap on the size of AUM. There are several case studies in the Indian mutual fund industry to drive home this conclusion, as for example, the SBI Small-Cap for which the fund house stopped accepting fresh investment at the end of 2017. The reason was that the fund house felt that with a large corpus it would be a struggle to find good investment avenues within the narrow universe of small stocks without much of impact cost.

Nevertheless, the rising AUM of HDFC Small-Cap Fund and other funds did not bother the fund house and they continued to accept fresh investments. A growing AUM means more income through management fees, which are charged as a percentage of every rupee managed. In the short term it may work but in the long term it is detrimental for both investors as well as the fund house. There are also cases with HDFC fund where despite having lower AUM, the fund is not doing well. A case in point is the HDFC Focused 30 Fund which has a corpus of just Rs 509 crore at the end of December 2019, and still ranks 42 out of a total 46 funds in its category. Hence, even with smaller fund size the funds are not performing well for the fund house.

One of the main reasons why despite such performance the fund house is able to maintain its market share is because of its marketing prowess, which helps the company in terms of its reach and clout among fund distributors. At the end of December 2019, independent financial advisors account for 40.6 per cent of the equity-oriented AUM.

Does this mean that investors should exit from these poorly performing funds? If return is the sole criteria for your investment, you should definitely re-evaluate these funds. However, if there are other reasons such as you have assigned the investment for some specific goals, you should consult your financial advisor to reconsider the funds and check if they can still meet your goals.