Delhi-based businessman Anil Rastogi has read a lot about asset allocation — goal-based investing across equity, debt and gold. “If only there was a single investment product that could have taken care of all my financial goals within the product itself,” he wonders.

Rastogi may soon get to invest in customised mutual fund products catering to different goals such as retirement, child’s education or wedding, according to his own timeline. Referred to as target-dated mutual funds or modelled portfolios, such MFs are likely to see the light of day soon, with new AMC players innovating around products and traditional players catching up with developing trends.

The asset under management (AUM) of the mutual fund industry rose five-fold from ₹6.97 lakh crore as on August 31, 2011 to ₹36.59 lakh crore as on August 31, 2021. The number of AMC players has moved in the narrow range of 38-41 over the last 10 years. With market regulator, the Securities and Exchange Board of India (Sebi), handing over the new AMC licences, product innovation is the way forward.

Consider this: Why buy a sofa, bed and lamp separately, when furniture manufacturer IKEA can sell you the complete room package customised in your own way? That is what the mutual fund company plans to offer. One doesn’t have to buy equity or debt mutual funds separately. “Such modelled portfolios have become a rage globally over the last two-three years. We are seeing a beginning in India,” says Vasanth Kamath, Founder & CEO, Smallcase.

The rush begins

Companies such as Samco Securities, Bajaj Finserv and Zerodha have recently received in-principle approval to kick off the AMC business. Other financial services companies such as Trust Group and Sachin Bansal-backed Navi Technologies have already launched new MF products. Samco AMC has announced a flexicap fund; NJ AMC will launch its maiden product in October. Fintech service providers Paytm, PhonePe and NiYO Money are looking to foray into the AMC space as well. AMC applications from Samir Arora’s Helios Capital, Rakesh Jhunjhunwala’s Alchemy Capital and Deepak Shenoy’s Wizemarkets Analytics Pvt. Ltd. (Capitalmind) are under process.

“There is no doubt that new AMCs will launch low-cost passive funds or smart beta funds, but a product innovation to invest for targeted retirement or other life goals is the future,” says Anish Teli, managing partner and principal officer, QED Capital, PMS. “Since the rebalancing for the desired asset allocation will happen within the fund itself, it will have tax advantage also,” he adds.

The new-age prospective AMC players have also hinted at launching such solution-based products. “We have interesting ideas around how the MF industry can be disrupted. I cannot talk about it in detail but the target-dated MFs which Vanguard has pioneered in the US can be structured for the Indian ecosystem,” says Deepak Shenoy, founder of Capitalmind. “We already have tools to marry debt and equity in our PMS business. We have insights around what clients want and how to rebalance the portfolio according to their risk appetite, market moves, taxes and inflows,” he adds.

Fintech player NiYO says new-age funds will essentially do what a traditional financial planner does. “In case of retirement, for example, the retirement date will be fixed and the rebalancing across assets will happen at the fund house level. Popular retirement product NPS already has this feature in the auto choice option. There are a lot of cost-effective ways to work through this. Such MF schemes will be run as per algorithms,” says Swapnil Bhaskar, founder, NiYOMoney.

Keeping costs low

Investors today are much more aware about how costs work. They are moving to zero-commission direct plans from the commission heavy ones. To be sure, solution-based ones such as retirement or education-oriented MFs do exist, but the expense ratios are steep, while there is also a lock-in period. Reducing the investment cost is what the new AMC players will focus on.

Navi Mutual Fund, for example, launched its cheapest Nifty50 index fund in July. Zerodha founder and CEO Nithin Kamath is clear that he will look at launching passive and smart beta products. NJ AMC has announced that it will only focus on rule-based factor investing. Meanwhile, traditional AMC players have also launched passive and smart beta products across different categories, but the newer players are expected to have an edge.

“Traditional AMCs have a conflict of interest between active and passive products because 90% of their revenues come from active funds. They won’t have the ability to promote passive funds unlike us,” says Nikhil Kamath.

“The product bouquet is expanding with the launch of new AMC players. First-time investors can make passive funds part of their core portfolio, while active funds could be treated as satellite investment options,” suggests Kaustubh Belapurkar, director of research, Morningstar India.

Changing industry dynamics

One thing is sure that active funds will continue to rule. For example, The Navi Mutual Fund’s cheapest index fund has accumulated only around Rs 100 crore, while ICICI Prudential Flexicap Fund launched in the last week of June and SBI Mutual Fund Balanced Advantage Fund launched in August have collected ₹10,000 crore and ₹14,500 crore, respectively. “It has become a fashion to talk about passive products, but at the end of the day, people end up investing in active funds,” says an industry player who didn’t wish to be named.

Meanwhile, newer AMCs are upping the game. Among latest innovations, they have launched bundled ETFs that are similar to solution-based products. ICICI Prudential AMC has tied up with Smallcase to provide bundled ETFs that combine equity, debt and gold in a single product. Nippon AMC and SBI Mutual Fund also have such products. “Traditional AMC players are trying to find ways to put together ETFs and MFs as a solution in order to form a package. They are doing it already with ETFs, while mutual funds and other asset classes could soon become a part of it,” says Vasanth Kamath of Smallcase.

Vinay M Tonse, MD & CEO, SBI Mutual Fund, says with new investors entering the industry and product categories being streamlined, investors will need easy and customised financial solutions. “These will have to be designed to address the financial needs of specific investor groups based on lifestyle and professions such as the millennial crowd, doctors, defence forces, homemakers, among others. Catering to such niche groups is going to be one of the key trends in the industry.”

Aniruddha Chaudhuri, head, retail sales, ICICI Prudential AMC, says the company is focusing on creating features and communicating clearly with investors. “Our latest feature, Booster STP is one such endeavour. What is necessary now is to create awareness about investments that align with one’s financial goals, rather than investments based on a fund’s past return.”

What happened in the broking space with two discount broking firms cornering the top slots will, however, not be easy to replicate in the MF industry. Traditional AMC players, especially the ones backed by banks, have a strong foothold in the distribution network and significant brand recognition. The top 10 players occupy 80% of the market share in the MF industry. So, where will the disruption settle? “The interesting thing to watch out will be how the market share of the top five AMC players moves over the next couple of years. This will indicate if new-age AMCs are making a difference in the MF industry,” says Gaurav Rastogi, CEO, Kuvera.

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