The size of a fund is another important aspect that an investor should take into account while investing in mutual funds. Although, the fund size cannot form basis of its performance, it still matters
01-Jan-2008 •Research Desk
HOW IT MATTERS
Size of a fund definitely has a role to play, but not when it comes to deciding which one to buy or sell. If we look at size in the context of equity funds, smaller funds have the capability of being more agile. This is especially true for mid- and small-cap funds. These funds can exit and enter stocks of a smaller market cap without affecting the price of the stock too much. But, if we look at the performance of large mid-cap offerings such as Reliance Growth and Sundaram BNP Paribas Select Midcap, this theory is disproved.
In the case of index funds, size may be an asset. Any inflow can be easily invested without giving rise to significant tracking error. In the case of a small index fund, the same inflow may look substantial and it may not be easy to allocate it without causing a tracking error.
Where debt funds are concerned, size is critical because it has a direct impact on the expense ratio. Larger funds can distribute fixed expenses over a number of investors and bring down the expense ratio. They can also negotiate better rates with issuers of debt paper.
On a closing note, there will be exceptions to all the above observations. Though theoretically there are specific kinds of funds which are better off either as large or small funds, there is no clear-cut trend to prove that a larger fund will perform better than a smaller fund or vice versa.