How does the corpus of a fund affect its performance? Funds with lower assets seem to be doing better than large-sized funds.
-Imran Baig
One cannot conclusively say that small-sized funds are doing better than their large-sized counterparts within the same fund house. But you have made a noteworthy point. A large size can be a cause for concern, particularly for mid- and small-cap funds. First, there is a need to find more and more attractively priced stocks. A large size can lead a fund towards over-diversification as even huge sums of money invested in particular stocks form only a miniscule part of the overall portfolio. This can impact performance since exceptional returns of a few multi-baggers tend to get diluted and averaged out in a huge portfolio.
Second, a large size tends to make the fund less agile. Liquidity problems are frequently associated mid- and small-cap stocks. A big fund might find itself stuck with a sizeable holding in a mid-cap stock from which it is unable to exit quickly because of poor liquidity. Large-sized funds can particularly find themselves prone to such a situation when markets suddenly turn sour and there are no buyers in the stock.
This article was originally published on August 10, 2006.
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