- HDFC Mutual Fund’s newly introduced “innovation fund” is yet another instance of the hazy thematic funds that AMCs are increasingly coming out with
- Many of these “innovation” and “business-cycle” funds are, in fact, largely filled with large-cap stocks, which makes their unique proposition questionable
- Their proliferation can be traced back to a 2018 regulation by SEBI that put a cap on schemes launched per category, but left a loophole for thematic funds
- The returns in these hazy funds are also mixed, leading to doubts as to their longer-term track record
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In early July, HDFC Mutual Fund
An actively-managed equity fund, its mandate is to invest in companies pioneering innovation in their product/services, process, or business model to “create value, solve problems, and maintain a competitive edge”.
The scheme information document went on to delineate what counts as “innovation” in a variety of sectors, from automobiles to pharma to finance. In spite of this, the fund’s raison d’etre seemed hazy, to say the least. After all, it’s hard to pin down what “innovation” is, no matter how much you wax on about it.
The concept is hardly new, but is now proliferating.
Several fund houses have launched similar schemes in the last few years. In fact, the top three funds in this category—SBI, ICICI Prudential, and Nippon—have cumulatively accumulated Rs 15,000 crore ($1.7 billion) in their innovation funds as of June. Others like Axis, Bandhan, and Tata Mutual Fund also jumped on the bandwagon.
Then there’s yet another scheme with a sketchy mandate: business-cycle funds, which 20 fund houses, including most above, have already launched. These are schemes that time their investments based on a “business cycle” in the economy. That is, periods of expansion and contraction. But again, the problem for investors is the same. It’s difficult to define, and mutually agree upon, when economies are expanding or contracting. And it is harder—even for seasoned economists—to predict which companies will do well in which part of the cycle.
Thematic funds like these have been around for a long time. They invest in companies based on a particular theme or trend. Think “Environmental, social, and governance (ESG)” or “digital transformation”. But fund houses are increasingly coming out with vaguer, more slippery themes that allow them to play fast and loose with what kinds of companies are included under them.
The result: innovation funds teeming with staid, old bank stocks. Axis bank, ICICI bank, HDFC bank. Plus many others that don’t quite tick the “innovation” box. The likes of Pidilite Industries, Bharti Airtel, and Maruti Suzuki.
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