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Does the fund size have any impact on mid- & small-cap investors?

Dhirendra Kumar sheds light on the impact of growing AUMs of mid- and small-cap funds on investors


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How does the fund size impact investors in mid and small caps?
- Satish

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If a fund in the mid- and small-cap space turns very big, then its impact on investors can be negative. A small-cap fund is bound to invest in small companies which usually face liquidity issues, as buying and selling shares of such companies in large quantities is often difficult. For example, a small-cap fund manager can buy 50,000 shares of a small-size company; however, it may be difficult for him to buy 5,00,000 shares. Besides, selling shares of a small company may result in a drastic fall in its price. Thus, a fund manager needs to take care of the buying and selling decisions in a fairly measured way.

Further, with growing assets under management (AUM), a fund manager has to look for more ideas or invest large amounts in the underlying stocks, which may not be possible. For example, a small-cap fund manager, running a fund worth Rs 300 crore, wants to invest in 30 companies, thereby investing Rs 10 crore in each company. However, the moment the AUM of this fund rises to Rs 3000 crore, it will pose a challenge to the fund manager.

On the other hand, when it comes to mid-cap funds, the definitions of these funds have been liberalised a bit to accommodate fairly large companies with reasonable liquidity. So, mid-cap fund managers can manage their assets well and sustain the growing AUM.

Thus, in my opinion, size is definitely a barrier for small-cap funds, as these funds lack manoeuvrability. For example, a Rs 3000-crore small-cap fund with one position that can't exceed 30-50 crore but has the ability to multiply in value substantially over a period of five years. The net impact of such performance will not be much on the fund because of the insignificant allocation to the stock. Thus, size becomes a hindrance to small-cap funds.

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