Before you invest your money in mutual funds, you are supposed to, besides evaluating the past earnings, check the size of the fund scheme. Financial experts believe that when the fund is small, it remains more volatile and when it is large, it may become less liquid.
The large size funds are believed to be more stable and they become huge by outperforming their rivals. But their performance may not continue to happen at the same pace.
S Sridharan, founder and principal officer, Wealth Ladder Direct says that the size of a mutual fund matters in some cases.
“In large funds, liquidity becomes a problem since there could be limited buyers for sellers. On the other hand, small funds can liquidate immediately. Turnover ratio will be higher in small funds and the ratio is small in large funds. So, the funds with small sized AUM would do well in the long run,” he said.
It is important to note that the assets under management (AUMs) can increase or decrease in two ways. It changes as a result of fresh investment or redemption. And secondly because of fluctuation in the market value.
Large funds
It is common for a mutual fund that performs well to receive more inflows. As a result, it grows bigger in size over a period of time. So, some investors believe that a large sized fund is good because it is expected to do well.
A fund with large AUM has the resources to expend on research, thus helping the fund and the investors at the same time.
For the fund schemes that invest in actively traded companies, liquidity is not a problem.
However, some investors contend that after the fund grows too big, it may not sustain its performance for a long period.
Returns on funds
Here we examine four funds, two in each category: small and large. Both belong to the mid-cap category.
Their returns are, by and large, similar but the size of schemes differs widely.
In the chart below, these two schemes belong to the mid-cap category and their returns are quite healthy. But the size of the fund is extremely small as IDBI midcap fund’s AUM is ₹183 crore and Taurus Discovery (Midcap) Fund’s size is ₹70 crore.
| Fund scheme | AUM (crore) | Return (%) |
| IDBI Midcap Fund | 182.96 | 16.00 |
| Taurus Discovery (Midcap) Fund | 70.39 | 18.24 |
In the chart below, these two funds fall in the mid-cap category. The returns are close to 20 percent but the size is colossal. Axis Midcap fund has AUMs of over ₹17,400 crore and HDFC mid-cap opportunities size is over ₹30,500 crore.
| Fund scheme | AUM (crore) | Return (%) |
| Axis Midcap | 17,436.13 | 21.80 |
| HDFC Mid-Cap Opportunities Fund | 30,571.76 | 19.04 |
Smaller funds
Mutual fund schemes that have a smaller AUM can show good performance because of their strategy. But the funds with smaller AUM usually have a higher expense ratio.
But for the fund schemes that invest in mid-cap or small-cap companies, investing a large sum can get difficult as their fund size swells. This happens primarily because the fund house will either have to find more value stocks or raise the stake in stocks that it already owns.
However, it must be seen that the size of fund house is merely one of the many factors that help determine the scheme’s worth. Other factors that matter more include the fund manager’s ability to outperform the market, track record of fund house and also the strategy followed for that scheme.
