Are the returns of big funds sustainable? Will it be a good idea to switch to a well performing fund with a significantly smaller AUM?
It depends on the category. It's a scale business. When it comes to liquid funds and short duration debt funds, the bigger the better. With large-cap funds, again, the bigger it gets the better it is. They will have economies of scale. There are two more categories under the new classification system which will be able to sustain the performance-Large & Midcap and Multicap.
I think mid-caps and small-caps will have a problem when they grow big. Watch out for the size. Suppose, if you chose a very well performing, Rs 500- Rs1,000 crore fund, there may be a concern with following through the strategies initially decided on. But I think there are very few funds which will have this problem.
The other effect of this classification system, which is good for investors is that funds will be predictable now. Earlier the fund would start as a mid-cap fund and then turn into large-cap as the AUM size grew. I have seen many funds which have changed track because they have grown big. This will no longer be possible.
Now they will have to decide where will they be investing and stick to that universe. It is very well defined. It will have greater predictability and the fund's trajectory will continue in the same direction with no scope of change.