MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

Does size of the fund really matter while investing in mutual funds?
- Kedar Bhaskar

In the case of funds holding majorly large-cap companies, there won’t be any issue if AUM (AssetsUnder Management) size is getting big. However, in the case of small-cap funds, if they turn very big, then there is a negative impact on the investor. A small-cap fund is a fund thatinvests minimum 65 per cent of the assets in small-cap companies that usually have liquidity issues. This is because buying and selling shares of these companies in large quantities is usually difficult. Say, for instance, a small-cap fund manager wishes to buy 50,000 shares of a small-cap company,then he can buy the same.However, it may be difficult for him if he wishes to buy 5 lakh shares. On the other hand, the share price can fall drastically as a result of selling shares of a small company. With growing AUM, a fund manager has to seek new investment ideas which may not be possible. Say, for example, a small cap fund manager managing AUM of Rs500 crore wishes to invest in 50 companies, then he may do so by investing Rs10 crore in each stock. But if the fund size grows to `2,000 crore, then it may pose challenge to the fund manager. When it comes to mid-cap funds, as per the definition,mid-cap funds can have fairly large companies with reasonable liquidity. So, the AUM of a mid-cap fund can be managed well and can also handle the growing AUM situation. Thus, AUM size definitely matters in the case of small-cap funds. However, large-cap and mid-cap funds in this case score over small-cap funds.

Where should I invest? Aggressive hybrid fund or dynamic asset allocation fund?
 - Madhav Bhosale

Securities and Exchange Board of India (SEBI) in its recategorisation circular has defined aggressive hybrid funds as funds which at all time would have 65 per cent to 80 per cent of the assets invested in equities and 20 per cent to 35 per cent in debt instruments. Dynamic asset allocation is defined as a fund that investsits assets in equity as well as debt and is managed dynamically. This means that in the case of dynamic asset allocation, the mutual fund manager would decide the asset allocation.However, in the case of aggressive hybrid fund, the fund manager has to respect the pre-defined allocation to equity and debt. If we look from the disciplinary perspective, then aggressive hybrid funds prove to be a better option than dynamic asset allocation. In any situation, it is difficult to predict the market and dynamic asset allocation tries to dojust that. It tries to predict the market and change the asset allocation accordingly. Therefore, investing in aggressive hybrid fund makes more sense than investing in dynamic asset allocation fund. There are high chances that the dynamic asset allocation fund may have higher turnover ratio as compared with the aggressive hybrid fund. However, a person with conservative to moderate risk-taking appetite should avoid investing in dynamic asset allocation funds and should instead opt for investing in aggressive hybrid funds. On the other hand, if you are someone who wish to keep the money for the long term and have moderately aggressive to aggressive risk profile, then you can think of investing in dynamic asset allocation fund.