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Does the asset size indicate anything about the mutual fund scheme future performance?

January 09 , 2014

While you are comparing similar mutual fund schemes you may find that their fund sizes may vary. Fund size typically means the total investor money that particular scheme has or is managed by that particular fund manager. In few cases you may see the difference to be fairly wide.

Now, you may want to know whether the scheme fund size makes any difference in over all returns / performance of the funds. Should you even consider this factor while choosing a scheme?

It is both yes and no. It does not have a straight answer. Before we try to get to know further, let us first understand why there is difference in fund sizes.

Reasons for the difference in fund sizes

Popular fund: If the scheme is coming from a large fund house or sold aggressively by various advisors then the scheme is likely to get hordes of investor money.

Performing fund: If a fund has been performing well over the past many years then the investors continue to pour more money in the scheme and thus the fund size increases manifold.

Value of the portfolio: If the underlying investments of the fund do well over a period of time naturally the value of the fund also goes up. The scheme size will grow even if fresh money hasnt come in to the fund.

Now let us evaluate how the size of the funds affects it.

Every mutual fund has a particular objective/ investment style and the size of the funds can affect the way the fund meets its objective.

For certain investment objective the size does not matter and in few cases the size hinders the investment style and performance gets affected.

Large cap diversified funds or index funds: In this category the size usually is not a problem. More and more funds coming in to the scheme will not affect the performance of the scheme. The fund manager will be able to quickly deploy the fresh money flowing in without diluting its investment objective. In fact the bigger the size the better it is as it expense ratio tends to be lower.

Debt fund: Even in debt funds, size does not impact the performance. But if the fund size is too small and the numbers of investors are few then the risk of one/two investor leaving can lead to distress sale of investments. Here too the rule bigger the better is true.

Small cap/mid cap fund: Here is where the size can create a big impact. Since mid cap or small cap funds follow the strategy of picking stock in thinly traded or low volume stocks, the large fund size can pose a huge problem for the fund manager. They will not be able to find attractive stocks on a consistence basis if the flow of fresh money is coming at a thick pace. These funds need to be nimble and if the size becomes too large then it tends to underperform or loses its objective.

So while picking up a fund do consider the fund size keeping in mind its objective.

Just looking at the size does not tell you whether the fund has done well or will do well in the future.


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