Newer Indian mutual funds launched since 2023 are posting higher one-year returns than larger, established rivals. While their smaller asset size allows for more flexible investing in high-growth stocks, investors should consider the limited track record and the higher volatility often associated with these smaller portfolios.
The Indian mutual fund sector is seeing a shift in performance, where newer entrants are currently outpacing established industry leaders during recent periods of market volatility. Schemes launched by newer Asset Management Companies (AMCs) since 2023, such as Bajaj Finserv Mutual Fund, Helios Mutual Fund, and Old Bridge Mutual Fund, have shown stronger returns compared to their larger counterparts in the same categories.
This performance difference often stems from the structural advantages of smaller portfolios. Large, established funds manage vast amounts of money, which limits their ability to buy small- or mid-cap stocks without significantly moving the share price. This challenge, known as impact cost, occurs because large trades can drive up the stock price, making it expensive for the fund to enter the position. Because of this, these large funds often maintain high exposure to stable, liquid large-cap stocks, which may not always capture the fastest market growth.
In contrast, newer funds with smaller total assets can invest in sectors like industrials and manufacturing without the same execution constraints. Recent data shows the Bajaj Finserv Small Cap scheme recorded a 7.5% return over the past year, while larger peers in the category averaged a decline of 2.6%. Similarly, the Old Bridge Focused fund logged a 5.4% gain, outperforming the 3.5% average loss seen by its larger competitors. These funds can pivot quickly to capitalize on market opportunities that larger funds might miss.
However, this performance comes with important considerations for investors. Most of these funds lack a long-term performance history, making it difficult to assess how they will perform across different market cycles. Additionally, regulatory bodies like SEBI have recently introduced strict stress-testing mandates for small- and mid-cap funds to ensure they maintain sufficient liquidity to handle redemption requests. This regulation highlights the inherent liquidity risk present when investing in smaller companies.
For investors, chasing short-term outperformance can be risky. While the current agility of new funds is a clear benefit, their long-term success will depend on how they maintain these strategies as their assets grow and market conditions change. The key monitorable for investors will be whether these funds can manage risk and deliver consistent returns as they scale, rather than focusing solely on recent performance figures.