I Took My Equity Fund to the Gym
When a fund grows in size, it becomes less nimble. But discontinuing your investments in it isn't the right thing to do
By Saurin Parikh | Jul 15, 2014
I had enrolled my equity mutual fund (EMF) into a gym. EMF is kind of overweight; it has more in its tummy than any other fund of its type. Being the largest fund in its category, it also tends to attract a lot of attention. And this is exactly what happened at the gym as well. EMF has been doing so well outside the gym; it became a celebrity of sorts inside the gym.
Whenever we would go for a workout, which wasn't very often because EMF wasn't too enthused about sweating it out with machines, we would get ambushed by the other patrons of the gym. Well, not really the both us; EMF was the one who got ambushed. I was conveniently pushed aside by some bodybuilders because they wanted to meet and greet EMF. You see, EMF is such a star performer out in the real world that everyone wanted to put their money in it. In the end, my gym idea backfired. EMF didn't lose weight; it just put on a lot more because it found fans everywhere it went.
Now, the reason why I took EMF to the gym was because I wanted it to lose some weight and become a little more nimble. I had invested in EMF when it was a lot slimmer and trimmer. But as it started to perform really well, it became the centre of attention within the fund industry. EMF became a household name, at least among fund distributors and investors. Everyone wanted a piece of its pie, everyone started investing in it. And EMF didn't disappoint. It earned handsome returns and kept its believers happy, which only resulted in more and more of them.
Finally, this got me worried. EMF was doing well, but it had bloated in size. This meant that it wouldn't be as spry as it was earlier. Moving in and out of stocks wouldn't be easy for EMF. It would have a tough time taking position calls, and most of its strategic picks wouldn't have any major impact on its returns. My worry was genuine, but my approach wasn't.
Taking EMF to the gym wasn't a smart move; there was no way I was going to get it to lose weight. Discontinuing my investments in EMF wouldn't have been a smart thing to do either. What was smart was reducing my allocation to EMF by a little bit. The fund had done well for ages; there was no reason to believe that it wouldn't continue to do so even if it kept getting bigger. But I wanted to have something more agile, so I reduced my allocation to EMF and started investing that money in a smaller fund that had the tendency to take strategic investment decisions.
This new fund was like an earlier version of EMF, and investing in it turned out to be a win-win situation for me. I now have the steady experience of EMF as well as the scheming nimbleness of the new fund. I also have an extra gym membership, though. Let me know if anyone's interested in that.