Does the size of a mutual fund affect its performance?

Published: May 18, 2016 at 9:22 am

How I wish I could say, Yes, the size of a mutual fund affects its performance! Then a lot of arm chair extrapolaters can proudly declare, “told you so!”. Unfortunately, I (thankfully like many of you) have a weakness for evidence. So I can’t yes for there is not even a shred of proof towards that end.

Two years ago, I did a case study on mutual fund size vs performance.  As the AUM increases the frequency with which Prashant Jain bought and sold securities in HDFC Top 200 and HFDC Equity decreased. However, looking at the rolling returns revealed no evidence that size impacted performance.

The reason for this post is because the situation had changed considerably. HDFC Top 200 and HDFC Equity are on the verge of being upstaged as the funds with the largest AUM. Now a simpler and more clear look at size versus performance is possible.

Two years the AUM distribution looked like this

churn

Focus on the X-axis alone. Those two dots were Top 200 and HDFC Equity. Now there are five more funds in the 10,000 Crore club.

mutual-fund-AUM-2016

This table from value research is self-explanatory. Anytime you want to check if the size has an effect on performance, this is a nice place to look. I have included five more funds  which have less than 10,000 Cr AUM.

  • How can Birla Sun Life Frontline equity fund with 11,202 Cr AUM be a five-star fund while HDFC Top 200 at 11,990 Cr a three-star fund?
  • How can ICICI Value Discovery at 11,904 Cr be a 5-star fund while HDFC Equity at 14,706 Cr a two-star fund?
  • How can HDFC Mid-cap opp at 10,649 Cr be a 4-star fund while Reliance Equity Opp at 10,544  a two-star fund?

These three observations indicate that as of now, there is no correlation* between the size of a fund and its performance. In an actively managed fund, the actions of the fund management is the primary (perhaps sole) performance driver.

* If you are thinking 14,000 Cr >>11,000 Cr, yes one cannot build a theory with one data point.

Please note that I am using star ratings for a current  peer comparison. Within the context of this post, it is a quick way to analyse performance.

This is what Prashant Jain, the fund manager had to say in Aug 2010  to Forbes Magazine

“You guys are making a big deal about size. Internationally, these kinds of situations arise when the size of a fund reaches say 1% of the market. Why should I get worked up about size when my fund is around 0.12% of the market? The Indian markets are growing and as the size of my fund grows, the market will be even bigger,”

The present market cap is about 1.4 Trillion Dollars. Assuming it about 1 Trillion dollars or 1000 Billion or 1,000,000 dollars.

At Rs. 65 a dollar, the total market cap is 6,500,000 Crores. And 1% of that is about 65000 Cr. So there is a lot of time and money before mutual fund size can influence performance.

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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