Mini to mega

Strong inflows into equity funds in the last five years has resulted in the emergence of jumbo funds - funds with assets over Rs 10,000 crore. We explore this trend in greater detail, along with the pros and cons of jumbo funds. This is our second story of the series.

The big funds have become still bigger at a much more rapid pace than their middling peers. We try to explore the reason for this phenomena in today's series.

Take multi-cap funds, a staple category for equity investors. Five years ago, the top five multi-cap funds used to manage anywhere between Rs 2,500 crore and Rs 5,000 crore in assets, with HDFC Equity Fund alone ruling the roost with Rs 10,300 crore under its belt. Today all the top five multi-cap equity funds boast sizes between Rs 9,566 crore and Rs 19,601 crore. While HDFC Equity Fund (Rs 19,601 crore) is still the unquestioned leader of this category, challengers such as ICICI Prudential Value Discovery (expanding from Rs 2,146 crore in 2012 to Rs 16,744 crore in 2017) and Kotak Select Focus (Rs 369 crore to Rs 13,947 crore) have seen an 8 to 34 fold growth in assets in mere five years.

Again, in the large-cap category, the asset sizes of the top five active funds ranged from Rs 2,500 crore to Rs 5,000 crore five years ago. HDFC Top 200 was the outlier, with its Rs 12,100 crore AUM in 2012. But today the five largest funds manage Rs 8,315 to Rs 18,969 crore, with four of the five leaders managing assets that top the Rs 14,000 crore mark. Here, SBI Bluechip, which has grown 21 fold, and Aditya Birla Sun Life Frontline Equity, which has expanded six-fold, have seen the most scorching pace of growth.

The story is repeated for the mid-cap category, where the top five were in the Rs 2,500 crore to Rs 5,600 crore range five years ago. But today, all of the category leaders manage more than Rs 5,000 crore each in assets. Here, HDFC Mid-Cap Opportunities and Franklin India Prima have seen the highest growth rates, expanding their assets seven-fold. Today, HDFC Midcap Opportunities, with Rs 17,917 crore under its belt, towers over rivals in the mid-cap category. It can give most large-cap funds a run for their money on the quantum of money managed.

With small-caps being quite the rage in the markets, almost all of the small-cap equity funds have seen manifold expansion in size. Here, Franklin India Smaller Companies Fund has seen its size shoot up from Rs 333 crore in 2012 to Rs 6,283 crore in August 2017. DSP BlackRock Microcap has seen its size vault from Rs 470 to Rs 5,803 crore and Reliance Smallcap has seen its assets burgeon from Rs 423 to Rs 4,546 crore - that's a 10- to 18-fold increase in size in five years.

The other interesting trend is that the ranks of the top five funds have seen very few new entries in the last five years. While the top five funds have actively jostled each other within the asset rankings, there have been very few instances where an obscure midget fund of 2012 has suddenly risen to the top five today.

This phenomenon of the big funds hogging the inflows and getting even bigger may have a couple of explanations. One, there is clear evidence that inflows into Indian equity funds gain traction only after a scheme has a demonstrable track record of three or five years. Therefore, old-timers with a proven record enjoy an edge over Johnny-come-latelies unless they slip up badly on returns.

Two, most large fund distributors and advisors in India, including banks, recommend funds to their investors based on asset size, apart from performance. Therefore, large funds automatically get included in the recommended lists, while smaller funds, even with good track records, struggle to break into this elite club.

Three, given that it simply does not make sense for any investor to own more than four or five schemes in his/her portfolio, there's little need for them to include newer funds when they can simply add to their holdings in the old, tried-and-tested ones. For smaller schemes to figure on the investor's radar, the fund houses need to showcase something really unique by way of either performance or strategy.

This is part of a series of articles on jumbo funds. Find the other parts in this link.