Does the size of a mutual fund affect its performance?

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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11 thoughts on “Does the size of a mutual fund affect its performance?

  1. Khushroo T Satarawala

    Hi

    Please correct me if I am wrong ...

    The reason why size of the AUM matters is because of the influence wielded by a ( or a set of) HNI investor(s) as a %age of the AUM.

    Kneejerk reactions of a HNI who has an investment of Rs.10 crores in a fund with an AUM of 210 crores could cause serious fluctuations in the NAV as compared to the same investment in a fund with an AUM of Rs 10,000 crores.

    There is a dimension of safety (from NAV fluctuations) for a small investor in a fund with a large AUM.

    Welcome your views ...

    Reply
    1. freefincal

      Sudden increase or decrease in AUM can impact performance, but I am not referring to that here. HNIs alone are not responsible for that.

      Reply
  2. Vivek

    Hello
    I am not sure I entirely follow the logic here. IF you are comparing AUM vs Fund quality (quality here being a function of performance, risk and type of fund), I don't see a detailed analysis being done. IF you are comparing AUM vs Value research ranking well yes then what you say makes sense in terms of different rankings vs AUM. But I don't think that was your point is it?

    Reply
    1. freefincal

      "IF you are comparing AUM vs Fund quality (quality here being a function of performance, risk and type of fund)" The Value research rating does take care of these factors. As for a more detailed analysis, you can see my previous post (linked above) on size vs performance when both HDFC funds were larger.

      Reply
  3. R Swaminathan

    I think you should check the returns of the same fund from its past AUM of say 500 cr to the present AUM of say 10000 cr in steps of every 500cr and see the trend of returns as a function of AUM and also see whether the same trend is applicable for other funds as well. This would give an idea whether the fund manager is able to employ large sums of money equally efficiently to generate similar returns irrespective of AUM size. Fund managers start out aggresively when AUM is small . As the AUM goes up, their approach becomes more conservative with greater investment in large caps as they have a past returns to uphold. YOu would see this trend in many funds like ICICI prudential discovery whose AUM has reached 10000cr.

    Reply
    1. freefincal

      All funds go down when the markets crash and all funds go up when the markets zoom! Then is the choice of stocks. Some fund with low AUM have the same no of stock as funds with high AUM. This makes it very difficult to pinpoint reasons for poor performance

      Reply
  4. Nikhil

    With the fund's internal mandates on number of stocks that can be held, %age holding in each company etc, don't the number of investible opportunities become progressively lesser as the AUM grows ?

    Reply
  5. Anand Vaidya

    I think for a fund with mostly largecaps or multicap funds, size of fund is probably not going to matter, since there are many good large cap stocks to buy (further) or hold.

    The same may not apply to small/mid cap funds. Note that HDFC Mid-cap Opportunities Fund already has 30% largecap stocks!

    Reply
  6. S Srinivasan

    I think there will be an effect on the size of AUM in the following scenarios:
    1. If you have a small-cap fund, and it grows quickly because of its wonderful out-performance. You can see the higher AUM could force the fund manager to now pick not so small caps, but mid-caps there by possibly impacting the returns.
    2. I think when funds cross the SEBI AUM threshold for Expense ratio - maybe there could be a small improvement in the returns...

    Reply
  7. Sanjeeva Reddy

    I have been investing in HDFC EQUITY Fund since Jan 2011(Monthly SIPs). This fund gave me 13% CAGR Returns . I am happy with its performance.

    Reply

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