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Investors Must Shun Size Bias

This predisposition to prejudice can be an invitation to trouble that may prove very costly

In terms of size, the Indian mutual fund industry has completely recovered from the financial crisis and its aftermath. According to data released for May 31, 2009, the total assets managed by the fund industry were Rs 6.3 lakh crore. The post-crisis low was Rs 4.6 lakh crore at the end of January, while the pre-crisis high was Rs 5.9 lakh crore in May 2008.

Just to give a long-term perspective, in March 2003, the mutual fund industry was about one-eighth of its present size at Rs 78,000 crore. This news has naturally led to a spate of news stories about how large the Indian fund industry has become. In terms of size, May 31 has been a sort of a landmark for an individual fund company’s size too.

Reliance Mutual Fund has become the first asset management in India to cross the Rs 1 lakh crore mark. And while other big asset management companies (AMCs) are smaller than Reliance, their size is nothing to sneeze at. The rest of the top five—HDFC, ICICI Prudential, UTI and Birla Sun Life — are all managing more than Rs 50,000 crore each.

While this piece of information is interesting for those involved in the investment business, investors must wonder what to make of it as far as their investment decisions go.

Does the size of the fund industry, or that of a fund company, or even an individual fund have any bearing on the investment decisions that an investor makes?

In choosing any kind of product or service from a business, most of us have a size bias, and salesmen play upon this. Should this size bias have any role to play in choosing investments? Is their any advantage in choosing a bigger fund or a fund from a bigger fund company?

Certainly, fund salesmen from the larger fund companies often say so. The ‘big-is-good’ theme that pervades other goods and services exists in fund companies also. The underlying logic is also no different. The idea is that if an AMC is big, then it must be good. After all, since more people are choosing to invest in its funds, it must be better than others.

What is left unsaid is that the AMC could just be better at marketing. There’s a cascading effect of bigger becoming even bigger, but that has nothing to do with investment performance.

The irrelevance of size applies to individual mutual funds too. There’s absolutely no correlation between the size of a fund and its suitability as an investment. In fact, the reverse might be true. Larger funds have more limited maneuverability. This may not matter for funds that invest in large-cap stocks, but investing a few hundred crore rupees in a mid- or a small- cap fund is an invitation to illiquidity.

All in all, size matters, but not always. There is a different set of very real problems that are faced by very small funds and fund companies. However, outside the extremes, it is difficult to see any real evidence of size having any effect on performance. As a positive factor, the size of a fund or a fund company is of relevance only to its owners, not to its investors.