Significance of net assets | Value Research The assets under management of a mutual fund have no significant bearing the performance of that fund
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Significance of net assets

The assets under management of a mutual fund have no significant bearing the performance of that fund

I wish to know the significance of the net assets held by a mutual fund scheme? Is it an important factor for an investor to look at while narrowing down a mutual fund scheme?
- Rahul Rijhwani

A remarkably persistent misbelief among mutual fund investors is that the size of a mutual fund matters. By size, we mean the amount of money that a fund manages, the industry jargon for which is assets under management (AUM). This belief has no basis in reality. There's no inherent reason that a larger fund is better than a smaller one. If a smaller fund has a better track record for risk-adjusted returns than a larger fund of the same type, then by all means investors should choose the smaller one. Of course, this belief persists not because of investors' fault but because it is actively promoted by the marketers of large funds. This belief gives them an additional handle to promote their fund against some others that may be doing better.

Is there any basis to this belief? It does happen that as compared to smaller funds, a relatively greater proportion of larger funds has better performance. However, there are many lousy large funds and many great small funds. As an investor, you must not fall into the trap of confusing cause with effect. Funds that have a long track record of good performance tend to get large as more and more investor money flows into them. However, do look at the previous sentence carefully. They were good, so they eventually became large. The reverse is not true. You can't pick a random large fund and say that just because it's large it must be good.

We suggest that you use returns and the Value Research rating as the main criteria to select funds. In theory, there are some borderline cases where one should consider size as a factor. However, in practice, these tend to point in the same direction as other factors like performance and ratings so there's hardly any need to bother about size. The asset size could prove to be beneficial only in the case of index funds and liquid funds.

It's also worth noting that irrelevance of size also extends to AMCs. Larger AMCs have higher visibility but their funds are not necessarily better than those from smaller AMCs.


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