Will the huge AUM of PPFAS Flexicap pose a risk of future underperformance?

 

A friend asked in AIFW : Will the huge AUM of PPFAS Flexi Cap pose a risk of future underperformance.

Let's discuss: 

• Will not low AUM funds underperform? Funds which had consistent good performance had later underperformed even with small AUM.
• PPFAS has only one equity fund. Many AMCs have different equity funds, of which the major portion of investments are the same. So, when you compare the AUM, isn't it fair to compare the AUMs of all the funds together of such AMC with PPFAS Flexi cap?
• Also, such AUM needs to be read with respect to the total market too. 75K Cr. when sensex was at 25K is not the same as when sensex is at 75K.

■ The simple answer is, any active fund can underperform. And this is only when compared to an index, where the results are obtained without any active management.

• Now, which index to choose? 
• Will not one index underperform with respect to another index? 
• There are certain risks when everyone starts investing in index funds.
• When a large number of investors put their money into index funds, the resulting influx of capital can lead to a concentration of investments in a small group of stocks, typically those with the largest market capitalization. This can cause several issues:
• Overvaluation: As more money flows into index funds, the demand for the constituent stocks increases, driving up their prices. This can lead to overvaluation, making these stocks more expensive relative to their intrinsic value.
• Lack of diversification: Index funds track a specific market index. As a result, a significant portion of the investments becomes concentrated in the largest stocks, potentially leading to a lack of diversification.
• Active funds can exploit this: Active mutual funds, which aim to beat the market, can take advantage of this situation. They can invest in undervalued stocks or sectors that are not part of the popular index funds, potentially generating higher returns.
• Risk of market bubble: The concentration of investments in a few stocks can contribute to the formation of a market bubble. If these stocks experience a sharp decline, it can have a ripple effect throughout the entire market.
• Systemic risk: The increased concentration of investments in a few stocks can also lead to systemic risk. If something goes wrong with one of these large companies, it can have a significant impact on the entire market.

■ What you can do is to have a holistic understanding, and choose a strategy that suits you. One can never be invested in the best performing instrument at all times.