What Groww, Angel One,

and other fintechs won’t tell

you about mutual funds
When it comes to mutual funds, a chunk of retail investors are riding
the hot-hand bias on popular fintech platforms, such as Groww,
Paytm* Money, and Angel One. But therein lies a cautionary tale—too
often, the allure of returns overshadows the awareness of investment
risks.

In December 2023, the skyrocketing mutual-fund industry hit a

milestone, surging past Rs 50 lakh crore ($615 billion) in assets under
management (AUM), as per the Association of Mutual Funds of India
(AMFI)—with a swift 25% jump from a year ago.

And retail investors, the real stars in this frenzy, have been stealing the
spotlight from traditionally dominant corporate investors. Their slice of
the AUM pie has leapt to 27% from 23% in May 2022.

What’s more, these retail investors are increasingly opting for direct
plans, cutting out distributors and saving on commissions—with the
share of these plans in retail AUM rising to 22% from 19% in the same
period.
This evolution is a result of a range of fintechs, also including the likes
of ET Money and Zerodha*, offering direct plans to new-to-market
investors. In November, fintechs injected 1.3 million systematic
investment plans (SIPs) into mutual funds—over half of the industry
total.

As new-age fintechs surged ahead in SIP inflows—which touched an

all-time high of about Rs 17,600 crore ($2.1 billion) in December—
traditional regular-plan distributors like NJ and SBI were left in their
wake.

The many online investment platforms that

have come up in the recent past and allow
direct investing in mutual funds seem to have
accentuated the trend
And the momentum shows no signs of slowing down. Even payments
giant Phonepe, dealing in commission-based regular plans, is racking up
big client numbers.

“A sustained bull market, ease of investing, wide distribution, and

increased awareness are among the factors driving the boom in mutual-
fund investments through fintechs,” said Ujjwal Jain, the chief
executive (CEO) of Phonepe’s investment platform Share.Market.
Yet, beneath the surface lies a striking weakness. The influx of money appears to be arriving in ways that
leave many uneasy.

“It’s crazy how they are sucking people in,” remarked the CEO of a mutual-fund house, highlighting the
clickbait tactics prevalent on many fintech platforms. The chief executive of another fund house noted
that many such platforms and portals often flaunt returns while downplaying associated risks. “It’s often
not in the best interest of investors,” he added. They and some others quoted in the story did not want to
be named as they didn’t want to be seen commenting on the matter

The nudge towards flavour-of-the-season bets, and spotlighting star

ratings of funds and past returns without enough guardrails can spell
trouble for investors, according to multiple people in the industry who
spoke with The Ken.
Markets are fickle, and yesterday’s gains don’t ensure tomorrow’s glory
—mutual-fund ratings included. Most of these platforms often neglect
crucial disclaimers, failing to emphasise that fund ratings or past returns
should never be the only factors in investment decisions.

“There’s a high risk of fintechs mis-selling and investors mis-buying,”

warned the second CEO, highlighting that excessive reliance on ratings
and returns can be precarious. Santosh Navlani, the co-founder and
chief operating officer of ET Money, also observed a general disregard
towards adopting a portfolio mindset, long-term wealth creation, and
risk management.

Sailing through a bull market feels dreamy, but when the tide turns,
those chickens will come home to roost.

Nudge nudge (wink wink)

The Indian stock markets have been on fire post-pandemic, and mutual
funds in the equity category, the darling of retail investors, have been
stealing the spotlight.

And it is the small-cap and mid-cap funds, along with hot sectors such
as infrastructure stocks, that have been delivering stellar returns,
especially in the past year.

It’s no surprise, then, that investors are betting on these winners despite
market experts sounding the alarms about high valuations and risks. Just
a few months ago, brokerage firm Kotak Institutional
Equities declared that mid and small-cap stocks had ventured into the
risky “bubble” territory.

Yet, many popular fintech platforms are nudging investors towards

these bets, flaunting “best return funds”, “top-rated funds”, “curated
lists”, and more, all without the proper disclaimers and disclosures.

Take the Groww app, for instance, showcasing a lineup of “high-return

funds” with 10 names arranged based on a “3-year returns” filter—
adjustable to 1-year and 5-year periods. These funds, mostly in small-
cap and infrastructure themes, boast “3 stars” and above—based on
ratings from investment-research firm Value Research.
Here’s the problem: while the spotlight shines on returns and ratings,
the high risks of investing in these counters post their dizzying run are
pushed into the shadows. Besides, there’s the old chestnut: past returns
don’t guarantee future success.

Then, there’s the Angel One platform that showcases funds with a high-
star rating based on its own mechanism.
But ratings are hardly carved in stone: many funds have undergone big
changes over the years. Also, even if the ratings are rigorously
calculated, they fall short of providing a comprehensive gauge of
investment worthiness; at most, they serve as a mere starting point.

Most fund-rating methodologies, by their very nature, prioritise past

returns over risk metrics and qualitative factors.
“Fund ratings should be just one among many aspects in the investment
decision,” said Kaustubh Belapurkar, director (research) at Morningstar
India, a mutual-fund-research house. Factors such as an investor’s
circumstances, risk tolerance, and time horizon should carry equal or
even greater significance.

If someone bought a small-cap fund…for a 2–3-

year horizon, it would be very risky. Small-caps
can be very volatile in the short term, as we
have seen multiple times. A horizon of 7–10
years in such funds improves the probability of
a good outcome

Paytm Money lists funds with “best returns” and shows comparisons
between fund returns and those of secure instruments like fixed
deposits. However, it overlooks a crucial detail: the contrast in risks.
While the latter boasts a notably low risk of capital loss, the same
cannot be said for the former.
The “investor choice” list on the wealth-management platform Kuvera
currently showcases many small-cap funds. But popularity cannot
ensure returns: what’s hot among many may not be the best fit for all.
Meanwhile, Phonepe, which offers regular plans, refrains from
assigning ratings to funds. It curates lists of schemes through its own
research, and the “top funds in focus” include small and mid-cap names.
Similar to various platforms, Phonepe also features a compilation of
high-return funds.

“It is important to assess fund philosophy or style, track record of the

investment team, risk, portfolio characteristics, and so on,” said
Phonepe’s Jain.
Angel One, Paytm Money, Groww, and Kuvera did not respond to
questions sent by The Ken.

What’s in a rating?
Fund ratings and historical returns often play tricks. Over time, funds
that were once top-rated have stumbled, while some previously
underrated ones have climbed up.
But then, mutual-fund ratings exist in an unregulated territory.

Morningstar, Crisil, and Value Research hold the industry standard in

India—followed by many fintechs, with some adding their own tweaks.
But the frontier is open for anyone to come up with their own ratings.
Take, for instance, Angel One, ET Money, and some media houses.

Some frown upon this.

The regulator should define a strong eligibility framework, asserts Jiju

Vidyadharan, senior director of Crisil Market Intelligence and
Analytics. This, according to him, will ensure rankings parameters are
carefully curated by experienced entities well-versed in mutual-fund
research.

License to show // While mutual funds are prohibited from promoting their scheme
rankings, there are no restrictions for fintechs and other distributors

But not all fintechs are playing the ratings game.

For instance, Zerodha doesn’t rate or rank mutual-fund schemes or give

lists. “Ratings don’t have much predictive value about fund
performance,” said Bhuvanesh R, a business analyst with Zerodha.
“Without human advice, they don’t help.”

Zerodha came to the decision of not ranking mutual funds after

considering the unpredictability and nuances of mutual-fund ratings, the
risk of misinterpretation, and the difficulty of explaining them to retail
investors in a direct-investing platform, added Bhuvanesh.

An executive at Groww, on the other hand, said that the list of top funds
based on “1-year returns” on the platform’s website is essentially a blog
post that is on its way out.
“Educational content on Youtube and other social media [platforms] are
not recommendations on funds to invest in,” they claimed, insisting that
the representation of funds on the platform is intended as an exploration
tool, not a push for investors.

“We educate investors on investing, product suitability, and risks on

Youtube and through offline channels. These initiatives are outside the
investing app,” they added.

While most fintechs bundle mutual funds with stock-broking services,

ET Money only provides direct mutual funds. Its in-house Mutual Fund
Report Card is open to all, but personalised recommendations come
with a fee and are exclusively offered to advisory clients.

“Unfortunately, the entire transacting base of the fintech ecosystem is

using past returns as the only barometer to evaluate funds,” remarked
Navlani.

He pointed out that given the lack of concern for risk in the current
market conditions, ET Money has opted out of featuring new fund
offers (NFOs) on its app.

While asserting the rigour of the “report card”, he acknowledged the

need to inform non-advised users about the importance of personalising
their investment decisions based on their financial goals and investment
horizons rather than solely relying on the Fund Report Card. “This will
be done shortly,” he said.

It’s only logical, considering the star-crossed experiences of ratings in

the past.

To rank or not to rank?

“If you pick a 5-star fund and look at its performance in the next three
or four years, the odds are it will end up becoming a 2-star fund,” said
Zerodha’s Bhuvanesh. “This is true globally.”

Data bears this out, even if not entirely.

In Crisil’s mutual-fund rankings report for the September 2018 quarter,

Axis Bluechip Fund held the top position among large-cap funds. But in
September 2023, it slipped to the bottom. Invesco India Growth
Opportunities—at the top in a list of five large- and mid-cap funds in
September 2018—ended up in the second-last spot.
The same happened in mid- and small-cap categories, with funds like
Axis Mid-cap and SBI Small-cap losing ground.
A host of factors can upend the ratings applecart. Whether it’s the
unpredictable shifts in the market, changes in fund managers, or
unforeseen black-swan events, these factors can cause funds to swing
either way.

If market-cycle changes can make or break star fund managers, fund

ratings are fair game, too. A prime example lies in the period from 2018
to early 2020 when growth investing—acquiring high-growth stocks at
a premium—was en vogue. This trend buoyed several schemes of Axis
Mutual Fund. However, when the market sentiment shifted to value
investing—purchasing undervalued stocks—Axis schemes took a hit,
while value-focused funds like HDFC Top 100 ascended the charts.

One notable example of the impermanence of fund ratings is evident in

the debt-fund schemes offered by Franklin Templeton India Mutual
Fund. In April 2020, the fund had to close its six debt schemes because
the fixed-income credit market dried up after the pandemic. So, despite
occupying the top spot in Crisil’s charts in September 2018, the
Franklin India Credit Risk Fund was absent from the rankings in
September 2023.

Moreover, unpredictable returns in certain funds also underscore the

futility of relying on ratings for predictions.

For example, Axis Bluechip Fund has shown lower annualised returns
compared to most other funds in the large-cap category and its
benchmark S&P BSE 100 Total Return Index over the past five years.
However, a turnaround in the company’s fortunes can’t be ruled out as
it readies for a new innings as well.
Direct mutual-fund platforms like Zerodha are
geared towards people who have the intent and
some ability to research and invest on their
own. Of course, only a small number of retail
investors are savvy enough to do this
But if fintechs don’t evaluate mutual funds, retail investors shooting in
the dark amid a sea of over 3,000 schemes would be a problem in itself.

Bhuvanesh said the key to this predicament is seeking financial advice

or personalised guidance. The hitch, however, is the scarcity of
registered investment advisors (RIAs) in India, numbering between 500
and 1,000. In a half-in-jest comment at a recent conference, Sebi
chairperson Madhabi Puri Buch proposed that India should boast 1
million RIAs by 2030

Easier said than done.

Tight regulations make it tough for RIAs to cater to a growing wave of

new investors. Bhuvanesh offers a solution that combines digital and
human resources. Imagine a user-friendly app that guides young
investors in mastering the basics. As the portfolio grows and the
investor’s circumstances change, the solution would shift to human
advisory, according to him. “We are trying to solve this. It’s not an easy
problem.”
Until a fix emerges, investors must navigate mutual-fund investments
on fintech platforms with a discerning eye—reading the fine print
before diving in.

“As an investor, it’s your duty to not blindly trust anybody. It’s your
hard-earned money,” as one industry veteran remarked, “Most of these
are just transactional platforms, not advisory platforms.”

*Paytm’s founder Vijay Shekhar Sharma and Zerodha’s perennial fund

Rainmatter Capital are investors in The Ken

Lede Image Credit: Mick Haupt/Unsplash