The size, or assets under management (AUM), of a mutual fund is often a matter of debate.
Some investors feel that a bigger fund is better. On the other hand, some investors doubt whether a fund will be able to sustain its good performance after growing too big.
So, does AUM impact a fund’s returns? Let’s look at the issue.
Impact of assets on large-cap funds
For funds that invest primarily in large-cap stocks, called large-cap funds (both active and passive), and most flexicap funds, the size of the fund isn’t a very big concern. Large-cap stocks are fairly liquid and have sufficient trading volumes, and that clears doubts about whether the size of a fund will allow it to sustain its performance.
Actively-managed large-cap funds are, anyway, finding it quite tough to beat benchmarks, and, hence, there is a case for only having passive index funds in your portfolio for providing a large-cap exposure.
For starters, an actively managed fund is a fund in which a manager or a management team makes investment decisions. A passively managed fund, by contrast, simply follows a market index.
Small- and midcap- funds
In the non-large-cap space, a bigger size can be detrimental to some fund managers and their styles. But don’t jump to conclusions. Let’s focus on small-cap funds.
If a small-cap fund, with a small AUM, wants to buy small-cap stocks, it will be much easier than it will be for a fund with a large AUM.
Assume a small-cap fund is worth around Rs 200 crore in assets. It wants to invest, say 5 percent of its corpus (Rs 10 crore), in a small-cap company with a market capitalisation of, say, Rs 500 crore. It can easily do it because the investment amount (Rs 10 crore) is not very large, compared to the overall market capitalisation of the listed company (Rs 500 crore).
Now, if a bigger fund, say, with assets worth Rs 5,000 crore, wants to do a 5 percent allocation (Rs 250 crore) to the same small-cap company (with Rs 500 crore market capitalisation), it won’t be easy (or even possible to do it efficiently).
That is because the Rs 250 crore to be invested is quite big, compared to the market cap of Rs 500 crore of the company. There will be an impact cost, which might push up the stock price of the company very high, making the entire investment exercise not worth the effort. Later on, selling such a huge stake in the company, too, may not be easy.
Small-cap funds primarily invest in smaller companies which have inherent liquidity issues. So, for the fund manager, buying and selling shares of these companies in large quantities can be very difficult.
This also means that, at least in theory, smaller-sized funds have better access to a wider variety of stocks, compared to their larger counterparts due to these liquidity issues of small companies.
And as you go down the market-cap ladder towards ‘smaller’ smallcaps, having a larger AUM can be an issue and impacts the buying and selling efficiency of the fund.
AUM is not the only factor
While AUM is a good indicator of the fund’s popularity as well as success (as new money comes when the fund does well), it should never be the sole factor for picking mutual funds.
Even before you consider AUM, do give weightage to the fund’s track record, performance consistency, upside and downside capture traits, fund manager skills, fund’s mandate and strategy, fund house’s pedigree and processes, expenses, etc.
For large-cap funds, flexi-cap funds, etc., size is not an issue. But at least for mid- and small-cap funds, after you have considered the above factors, one can consider shortlisting funds which are not too large, AUM-wise.
There is no one right size or one definition of what is a good corpus size for a fund. Also, given that many variables impact a fund’s performance, a large fund may continue to do well even after it has become too large, in many people’s view.
So never consider corpus size as the main reason for fund selection. If you have to, always look at the size of the fund from the context of the fund’s investment mandate and stock-universe at the disposal of the fund manager.
