Does Fund Size Matter?

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

Every investor aims to invest in funds that have an established track record. The consistent performance track record of a fund confirms its ability to perform well over different market cycles. However, the flip side is that funds with a long-term track record usually grow too large in size. Unfortunately, the size of the fund often creates a dilemma in the minds of investors about its future prospects. Therefore, the question that needs to be addressed is whether the size of a fund should stop investors from investing in it. No doubt, a fund can become unwieldy to manage efficiently if it grows too large.

However, it may not be a disadvantage for all types of funds. Remember, the impact of the size of a fund on its performance largely depends upon the asset class it invests in and investment strategy or philosophy it follows. For example, in case of a pure large-cap fund or a fund that invests pre-dominantly in large-cap stocks, the size of the fund may not matter much. That’s because these stocks are quite liquid and hence buying and selling them in any quantity is not a problem for a fund manager. Similarly, the large fund size also may not have any impact on debt funds like liquid fund, ultra-short-term and short-term income funds.

However, a fund’s performance can suffer if its size outgrows its investment style. For example, a mid-cap fund where the basic differentiation within the peer group is how effectively the fund manager does the stock picking, the large size of the fund may force him to make certain compromises in terms of quality of the stocks and liquidity. Considering that this segment of the market remains under-researched, there aren’t too many great opportunities here. However, considering the potential of mid-cap companies to do well, these funds do attract large sums of monies when the markets do well. In a way, at times, these funds become victim of their own success.

There is no standard combination that can suit the requirements of all kinds of investors.

Similarly, if a sector fund becomes too large, the fund manger may struggle to invest in the sector efficiently. Another dilemma for investors is to find a balancing point that can ensure that their portfolio risk remains within their risk-taking capacity. An asset allocation strategy can help them in this process as it combines various asset classes such as equity, debt and gold into a portfolio. Unfortunately, retail investors generally find the process of asset allocation a little cumbersome and hence often look for easier solutions. No wonder, retail investors often believe that a capital protection plan provides answers to their needs such as asset allocation and balancing the risk and reward.

Another challenge for investors is to build a portfolio that has the potential to deliver the assumed rate of return considered while planning investment for different goals. One of the factors that often create a gap in what investors achieve from their mutual fund portfolio and what they set out to achieve is following a strategy where decisions are made on the basis of the mood of the market. Clearly, not much attention is paid to having the right exposure to different asset classes as well as market segments such as large-cap, mid-cap and small-cap stocks. It is important to understand that there is no standard combination that can suit the requirements of all kinds of investors as every investor has a different risk profile, time horizon and investment objectives. As is evident, suitability is the key to investment success for long-term investors.