A surge in inflows has increased the size of mutual funds (MF) across categories in recent years, taking the assets under management (AUM) of the industry to within striking distance of Rs 40 lakh crore.
But does the large size of a fund denote better performance, or does a smaller fund mean superior agility and performance? A CRISIL Research study throws up valuable pointers.
Small- and mid-size funds generate superior returns
To analyse how large, mid-size, and small funds have performed over the years, the study collated the AUM data for four categories — large-cap, mid-cap, small-cap and flexi-cap funds — for the period starting post re-categorisation of funds (i.e., January 2018), to September 2022, on a quarterly frequency.
Funds were classified as large-size, mid-size, and small-size in terms of quarterly AUM, following a percentile approach — the top 60 percent were classified as large, the bottom 10 percent as small, and those in the 60-90 percent range as mid-size.
Next, the average performance of all the schemes within each fund-size group was calculated separately on a daily basis.
The universe of schemes was revised on a quarterly basis, based on the quarterly average AUM as discussed above. Based on this data, CRISIL Research evaluated what will be the value of Rs 100 invested in large-size, mid-size and small-size funds, for each of the four categories.
The analysis shows that mid-size and small-size funds gave superior returns across the categories analysed:• Mid-size funds gave the best returns in the large cap and small cap category, of 10.9 percent and 11.2 percent, respectively
• Large-size funds were the worst performers in the large-cap, mid-cap and small-cap categories, and came second in terms of returns in the flexi-cap category
The superior returns given by mid-size and small-size funds indicates they are more agile. Large funds tend to be dragged down by their higher concentration in liquid stocks or securities that can take in their large quantum of investments.
Prudence required in fund selection
The study shows that the size of a fund is no guarantee of its performance. Indeed, the performance of small- and mid-size funds was better compared to large-size funds in the period analysed.
Large size does have its benefits, though. For instance, a large corpus helps a fund handle a short-term liquidity crisis better than a smaller fund. The SEBI (Securities & Exchange Board of India) mandate to lower the expense ratio of funds as they increase in size is also a positive for investors as it reduces their total cost and improves their overall return. Further, we have also seen that there is a higher incidence of mergers / closures in case of mid- and small-size funds.
That said, asset size should not be the only deciding factor while selecting funds. It is equally important for investors to look at factors such as performance, particularly long-term performance. Investing or exiting based on short-term performance, typically seen during bull and bear phases in the market, is best avoided. Investors should also look at consistency of outperformance across market phases and calendar years to understand the real performance of a fund.
Investors should also consider the portfolio, as the outperformance may be due to investments in some risky bets, or due to concentrated holdings, which might unravel when the tide turns.(Jiju Vidyadharan is Senior Director, CRISIL Market Intelligence & Analytics. Views are personal)