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Is it safe to invest in funds having a small asset size?

Funds with a small asset base could be good, but a good fund is the one that has proven itself over a complete market cycle, advises Dhirendra Kumar

Quant and PGIM mutual funds have given very good returns over the last three months. Nevertheless, their asset base is very small. So, given that, is it safe to invest in such funds?
- Rajesh Kumar

Yes, it is good to invest in funds that have demonstrated their capability or that are impressive, even if they have a small AUM base. This is because a small base doesn't matter. In fact, my sense is that the smaller the fund is, the better it is. When funds get bigger, they tend to face what is called a winner's curse, i.e. a fund succeeds with its good performance, it gets more money and the strategy that it follows to give the outperformance gets very difficult to replicate, as it gets very big. So, the winner's curse tends to catch up with better performing funds and therefore, a small fund could be good.

But I would like to warn you that three-month performance is not good enough for you to make an investment decision. My understanding of a good fund is that it should have done well in a rising market, as well as in a falling market, better than its peers and better than its index, which ultimately makes it a full-market cycle and it will be a period of four-five years, encompassing a rising phase and a declining phase. The three-month period that you are seeing right now may be quite misleading.

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