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Does Size of Mutual Fund Really Matter?

Does Size of Mutual Fund Really Matter

It is natural for any human to think that big shops, retail chains or big media houses offer better services or goods. The basic logic behind this thought and belief is that businesses grow and become big only when it has a one single motive to provide happiness and satisfaction to its customers. This may or may not be true.

However, the above belief is far from being true to anyone when it comes to Mutual Funds (MF).

Many investors carry an opinion that the amount of money managed by a mutual fund house also known as the size of a mutual fund scheme, is an important factor to consider while investing in mutual funds. However, this is not true and has no actual proven basis to stand on. There is no natural reason for a smaller fund to be worse than a larger mutual fund. If a smaller MF scheme as compared to a larger MF scheme falling in the same category shows better performance, yield better results and track record, then it is obvious that investors will opt for the smaller fund.

The reason for the above stated point is believed as the investors cannot be assigned by just assuming the ‘big tends to be good.’ Another reason of the belief is the fact that sellers of bigger MF schemes tend to promote such notions quite actively as it offers them an extra medium to advertise their Mutual Funds against the other smaller funds which may perform better.

How true is it? Bigger mutual funds are better.

A detailed information available on different platforms about the performance of various funds, shows a slightly bigger percentage of large Mutual Funds have shown better performance as compared to smaller MFs. However, this observation is scattered and need a detailed observation from different platforms. There are several smaller good funds and there are several bad big MFs.

Investors need to take extra care to avoid falling into the trap of false reasons with immediate effect. Mutual funds which have a good track record of giving returns over a long period of time become bigger due to increased influx of investor funds into them and such cash takes a long time to increase and grow. These MFs performed well and hence they eventually got bigger.

 Do ‘smaller mutual funds hold water better’?

One just cannot randomly select any big mutual fund and decide that it must be good just because it is big. Similarly, one cannot select a smaller mutual fund which is on a good track record and declare that its track record does not matter and one should not invest in it only because it is small. Additionally, the performance of a mutual fund is also based on several variables that play an important part in making a fund bigger or keeping it small size ticket.

The matter of fact is that the main reasons are the marketing capability of a large fund scheme and the influence and reach of its parent company among their MF distributors. This may include other variables as well. For instance, there are many equity funds of the company which are being launched on a bigger scale on the very first day itself due to their tremendously hyped NFOs reflecting at the top of the fund markets. However, few of these funds have been found to be moving on a poor track and showing poor performance each year still they continue to remain big funds.

It is important to note and understand that there are number of comparatively small equity mutual funds in the Mutual Fund sector which have shown good performance over the long term and definitely need a scrutiny. Whenever you plan to invest in this kind of mutual fund, or when praise is heaped on a particular fund by your financial analyst, then such an idea should be dismissed by the sellers of bigger funds.

Sellers of larger funds often argue over the comparison of an INR 100 crore fund with an INR 1,000 crore fund, which is not right. Such an argument is a gimmick, a trick. Any investor is neither concerned about the size of a fund nor a fund house that measure up to the pecking order in the fund sector. If a MF is giving good returns over a period of time and has high rating given by the rating agencies, then the size is irrelevant.

Does the size of a mutual fund actually matter?

There are many examples when MF size does matter. It should also be noted that for some kinds of big equity funds, size can prove to be a disadvantage. For example, big mutual funds with their focus on mid-cap and small-cap shares may find it difficult to gather sufficient shares where they can invest their money in. However, during the negative cycles of the share markets, such large MFs may experience double negative consequences of poor liquidity and reduced values rapidly.

The key thing to remember always is the fact that investors should not select one single fund over the other on the basis of their size, as this may result in making some really bad investment choices by you.


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