Small and mid-sized funds have performed better than their bigger counterparts in the past few years. Does the size of the mutual fund really matter? You decide
World-renowned fund manager Peter Lynch says, “My biggest disadvantage is the size. The bigger the equity fund, the harder it gets to outperform the competition.” This saying holds true even for the Indian mutual fund industry.
retail investors. Unfortunately, such schemes have failed to deliver decent returns in the past few years.
On the other hand, newer schemes with limited size have been able to outperform and give huge returns over the benchmark indices. There is a perception in your mind that larger the fund size, better the performance of the scheme.
But in fund management, its gets more and more difficult to manage large-sized funds.
SIP) is a very successful phenomenon in the Indian mutual fund industry with a large number of investors entering mutual funds only through SIPs. So, whenever the fund receives money - whether it is weekly, monthly or quarterly, the fund manager needs to find opportunities in the market. It
becomes even more difficult for small and mid-sized funds to look for investing ideas as liquidity plays a very significant role in such funds and uncertain market conditions.
Large-sized funds can create problems for fund managers not only
in the mid and small-cap categories but also in the multi-cap and large-cap categories. The biggest issue any fund manager faces while managing large-sized mutual funds is that of liquidity and the availability of enough stock opportunities in such volatile markets.
To cite an example, many large-sized funds like HDFC Top 200, Franklin India Bluechip and DSP BlackRock Top 100 have struggled to outperform the market in the past few years.
Having said that these are funds that have seen different market cycles and superior past performance and can bounce back sooner than later.
But if we look at some other schemes with small corpus like Mirae Asset Emerging Bluechip Fund, SBI Magnum Midcap and Franklin India Smaller Companies Fund, we find that these funds with less than 3000 crores of the total corpus have delivered huge returns in the last few years. Many such funds have given returns in the range of 20% to 25% in the last year.
When it comes to funding management, the size of the fund becomes a big hindrance to sustain its positive returns on a continuous basis. For example, if a fund manager runs a small fund with a corpus of 3000 crores, he can invest in any stock he likes.
Suppose he invests in stock ABC’ and if he is bullish on that
particular stock, he can buy up to 10% in the fund. If his call goes right, then the fund might deliver outstanding returns and vice versa.
But supposing the fund manager manages 10,000 crore funds, he
cannot have 10% in any single stock, which might come to 1,000 crores. Such a strategy could backfire in a big way if that stock does not give the fund manager the desired result. Even if the fund manager takes a small exposure in that stock, it might not have an overall impact on the fund.
It is a known fact that whenever the funds get bigger, the universe of stocks gets smaller. Fund managers come in a situation where they can invest in select stocks out of hundreds. The competition gets fierce and it becomes more and more difficult to outperform the main benchmark indices.
Many funds in India have performed very well in the past few years and once such funds get popular and start delivering positive returns on a continuous basis, they find more and more investors coming into their fold. This is where the problem of underperformance begins.
Globally we have seen how many funds became too large to handle; either they were turned into close-ended funds or they stopped taking in fresh investments. Even in India, IDFC Mutual Fund is one such fund house, which does not allow lump sum investments in their IDFC Premier Equity scheme. However,
investors can invest through SIPs.
Many times when a fund becomes big, the fund manager sticks to
picking up stocks in line with the benchmark indices in order to take less risk. Many argue that with a larger corpus, the fund becomes ‘benchmark-linked funds’. This, in turn, would give the investor returns in line with the benchmark and take it high compared to index funds.
Of the many fund managers, some prefer managing small funds because it allows them to enter or exit any particular stock with ease, which becomes almost impossible in big-sized funds. However, one should never go by huge returns by small funds because few winning stocks in the portfolio could have a large impact on the fund’s performance.
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