One of the common questions that investors ask when choosing a mutual fund is how big the fund size is. Many people assume that bigger funds are better because they have more resources, more diversification, and more economies of scale. However, this is not necessarily true, especially in the context of the Indian market. In fact, fund size matters less for investment in Indian market than other factors such as fund manager’s skill, investment strategy, and risk-return profile.
The Indian mutual fund industry has grown rapidly in the past decade, reaching an average asset under management (AAUM) of INR 40.80 trillion as of January 2023. The industry has also witnessed a surge in retail participation, with more than 10 crore folios as of May 2021. The increasing digital penetration, smart cities, and data speeds have also facilitated the expansion of asset shares to smaller cities and towns.
However, bigger fund size does not always translate into better performance or lower costs for investors. There are several challenges and trade-offs that large funds face, such as liquidity constraints, market impact costs, portfolio concentration, and style drift. These factors can affect the fund’s ability to generate alpha (excess returns) over the benchmark and maintain consistency over time. Moreover, large funds may not be able to take advantage of niche opportunities or emerging sectors that offer higher growth potential but have lower market capitalization or trading volume.
Therefore, investors should not base their decision solely on fund size, but rather look at other aspects such as the fund manager’s track record, investment philosophy, portfolio composition, risk-adjusted returns, expense ratio, exit load, and suitability to their goals and risk appetite. Investors should also diversify their portfolio across different fund categories, asset classes, sectors, and themes to reduce their exposure to any single fund or market segment. By doing so, they can optimize their returns and minimize their risks while investing in the Indian mutual fund industry.
Why fund size matters less in India?
There are several reasons why fund size is not a very important criterion for selecting a mutual fund in India. Some of them are:
- India has a large and diverse market with many opportunities for growth and value investing. A fund manager can find many attractive stocks across different sectors and market capitalizations, regardless of the fund size. Therefore, a smaller fund does not necessarily mean a limited investment universe or lower returns.
- India has a relatively low correlation with other global markets, which means that Indian stocks are less affected by external shocks and events. This reduces the need for diversification across different regions and asset classes, which is one of the main benefits of investing in larger funds. A smaller fund can still achieve adequate diversification within the Indian market by investing in different sectors and styles.
- India has a high level of liquidity and transparency in its stock market, which makes it easier for fund managers to execute their trades and manage their portfolios. A smaller fund does not face significant challenges in terms of liquidity or impact cost, which are common problems for larger funds in less developed markets.
- India has a competitive and dynamic mutual fund industry with many players and products. A smaller fund can still stand out and attract investors by offering superior performance, lower fees, or niche strategies. A larger fund does not necessarily have an edge over a smaller fund in terms of brand recognition or customer loyalty.
What factors matter more than fund size?
While fund size is not a very relevant factor for choosing a mutual fund in India, there are other factors that investors should consider more carefully. Some of them are:
- Fund manager’s skill: The most important factor that determines the success of a mutual fund is the skill and experience of the fund manager. A good fund manager can generate consistent and superior returns by identifying undervalued or high-growth stocks, timing the market movements, and managing the risks. Investors should look at the track record, style, and philosophy of the fund manager before investing in a mutual fund.
- Investment strategy: The second most important factor that influences the performance of a mutual fund is the investment strategy that it follows. A fund can adopt different strategies such as growth, value, dividend, thematic, sectoral, or multi-cap depending on its objective and risk profile. Investors should understand the strategy and its suitability for their goals and risk appetite before investing in a mutual fund.
- Risk-return profile: The third most important factor that affects the outcome of a mutual fund is the risk-return profile that it offers. A fund can have different levels of risk and return depending on its portfolio composition, asset allocation, market exposure, and volatility. Investors should compare the risk-return profile of different funds and choose the one that matches their expectations and preferences.
Fund size is not a very significant factor for choosing a mutual fund in India. This is because fund size does not necessarily reflect the performance or quality of a mutual fund. A large fund may have more assets under management, but it may also face challenges such as liquidity constraints, higher transaction costs, and difficulty in finding suitable investment opportunities. A small fund may have less assets under management, but it may also have more flexibility, lower expenses, and better potential to generate alpha.
There are other factors that matter more for investment in Indian market. These include fund manager’s skill, investment strategy, and risk-return profile. Fund manager’s skill is the ability of the fund manager to select the right stocks or bonds, time the market movements, and manage the portfolio efficiently. Investment strategy is the approach or philosophy that the fund manager follows to achieve the fund’s objectives. Risk-return profile is the trade-off between the expected return and the volatility or uncertainty of the fund.
Investors should focus on these factors and select a mutual fund that suits their needs and objectives. They should look at the past performance of the fund manager and the fund, the consistency and stability of the returns, the expense ratio and exit load of the fund, and the alignment of the fund’s objectives with their own goals and risk appetite. They should also diversify their portfolio across different types of mutual funds to reduce their overall risk and enhance their returns.