Limiting factor in India’s equity investing

So if I want higher returns, now this is where it flips away from being me and it’s no longer my characteristic, but I do want higher returns for higher risk, then you choose which instrument has actually given you those higher risk. And I think by and large, this has become a function of size and manager affluence. So the size question would be that as you grow bigger and bigger in size, the number of companies that you can buy into in India becomes smaller and smaller.

So now the biggest Indian mutual fund is nearly 80,000 crores.

Oh, they hit 80,000 crores?

70 plus thousand crores. So at that rate, at the 80,000 crore rate, even if I have 100 companies, I don’t think he has 100 companies, he has 50 or 60 companies. But you’re still buying more, nearly a thousand crores per company.

Now the number of companies that you can afford to buy a thousand crores for is now countable in the total number of companies you actually have. The 100th company in India today has a 1 lakh crore market cap. That means if you bought 100 companies with a thousand crores each then the 100th company you would own 1% off.

So effectively, you’re owning more and more percentage of… So what this happens is you just have to spread yourself too thin. You can’t meaningfully take large bets.

And until Indian market cap of Indian companies reaches a much higher degree, you’re limited by the growth of… The size of the mutual fund is greater than the growth of market cap of all the companies. So in the sense that that becomes your limiting factor.

— Capitalmind Podcast: Mutual Funds, PMS, or AIF: Choosing the Right Investment Vehicle for Your Needs