If everyone invested in your 5-star and 4-star funds, then would these funds be really capable of handling such a large corpus. You had pointed out in one of your more recent issues about the rising corpus of Reliance Growth which could affect its performance. But what about HDFC Equity, which is managing assets well above Rs 3,500 crore?
In the context of the present asset sizes of the Indian mutual funds, a huge asset size is more of a concern for schemes, investing predominantly in mid- and small-cap stocks. The main reason is that such stocks happen to be relatively less liquid. The increasing corpus of a mid-cap fund can translate into disproportionately high amounts of money being invested into less liquid mid-cap stocks. This could be detrimental to the interest of investors, if markets experience a sudden decline.
Moreover, mid-cap funds are meant for aggressive investors who are looking for high returns. But a huge size can become a drag on their performance. This is because even a large amount of money invested in a small but promising stock would constitute only a miniscule portion of the fund's portfolio. And should the stock perform very well subsequently, its impact on the fund returns would be meagre. Therefore, the fund manager may find it difficult to generate trail-blazing returns that he achieved with a small-sized fund.
But we don't think that large-cap- oriented equity funds (like HDFC Equity) are large enough to face difficulties of a similar kind. Unlike mid-cap stocks, large-cap stocks are much more liquid and have the potential to absorb much higher volumes of transactions without impacting the stock price too much. Therefore, while concerns have started to emerge about the growing sizes of mid-cap funds, the same cannot be said for large-cap funds as of now. Nevertheless, you have raised an important issue, and it is entirely possible that the star performers of today can turn into laggards due to their gigantic sizes. Investors should monitor the performance of their funds periodically and may decide to exit a fund if it under-performs for a considerable length of time and drops down the ratings ladder.