Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Size matters, or does it? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 15, 2000

    Size matters, or does it?

    Are bigger funds at an advantage over their smaller counterparts? Most investors seem to believe that the bigger the fund, the higher will be its returns. Thatís not necessarily true.

    A supple and lithe boxer has the advantage of agility and nimbleness on his side. With this, he can overcome a very heavy and bulky opponent. Although the heavier boxer prides himself because of his weight and physique, his very weight proves to be his undoing. He finds his bulk too unwieldy and clumsy against his light-footed opponent and this often leads to his downfall. Of course, that is not to say that all heavy boxers are losers. But heaviness comes at a price.

    The same is the case with mutual funds. A smaller fund (of say less than Rs 500 m) is not necessarily at a disadvantage as compared to its larger peers. Here is why.

    Advantages of small portfolios

    • Nimbler. Just like the lighter boxer in our example. Smaller funds are nimbler. So fund managers find it easier to reshuffle stocks in the portfolio. For a Rs 500 m fund portfolio manager, offloading say Rs 50 m (10% of net assets) is one dayís job. His fund and even the market is unlikely to feel any impact. But if a Rs 5 bn fund portfolio manager tried offloading Rs 500 m (10% of net assets) in one day, the impact on the fund could be dramatic. The fund manager would be forced to offload the stock over a few days so as to deaden the impact on his portfolio.

    • More focus. Smaller funds own fewer stocks. They are able to research their stocks more effectively, and tracking is relatively easier. Fund managers generally have a handful of favourite stocks (about 10-15) and watch these stocks closely.

    • Performance. Larger funds find it that much more difficult to beat the market. They just about manage to match the benchmark indices perform like the market averages, or like an index fund, except that itís saddled with management and transaction costs. This cost disadvantage explains why large funds often trail their smaller peers as well benchmark indices.

    Advantages of large portfolios

    But there are times when size does matter. Despite the factors favoring small funds outlined above, large funds do manager to post better performance than their nimbler peers. Larger funds benefit from the following characteristics:

    • Superior talent: Larger funds are perceived as being more prestigious (and often rightly so) and are in a position to pay high salaries (and perquisites) to attract and retain the best portfolio managers and analysts. Large funds also get a more comprehensive coverage of the market as they employ a larger team of professionals. This allows them to take more informed decisions vis-ŗ-vis smaller peers.

    • Lower expense ratios. As larger funds have more assets under management, they enjoy economies of scale in transactions. Other things being equal, lower costs lead to improved results and higher returns for investors.

    • Trading advantages. Certain investments are typically made in large lots. Money market instruments, government securities (gilts) and bonds are a case in point. Trades in these instruments tend to be very large, and fund managers can negotiate better deals by swapping larger lots.

    However, there are no set rules in the industry as far as the portfolio size is concerned. A small fund could outperform a larger fund by a big margin.

    Fund Name Net
    Assets (m)
    Since inception
    Discovery Stock
    380 7.2 8.0% -5.7% -5.7% 25.4% -5.1%
    Alliance Equity
    5,694 38.5 14.9% -3.5% -5.0% 13.5% 80.7%
    Kothari Bluechip
    2,301 24.4 15.2% 2.9% -0.7% 9.5% 30.0%
    ING Growth
    13 16.7 17.3% -17.6% -17.2% -1.1% 39.6%
    Zurich (I) Equity
    369 19.7 8.6% -4.3% -8.8% -6.4% 13.5%
    K 30 458 16.5 10.8% -5.6% -10.2% -10.4% 44.3%
    Pru ICICI
    Growth Fund
    4,727 23.0 10.5% -8.3% -7.1% -12.6% 39.5%
    Sun F&C
    Value fund
    358 21.4 16.9% -5.3% -9.8% -12.6% 29.4%
    Birla Advantage
    5,489 35.6 6.2% -15.7% -22.4% -22.3% 30.7%
    plus 1993
    3,482 16.9 13.2% -27.8% -24.7% -37.3% 8.7%

    *Coumpounded Annual Growth Rate
    (Net assets of the funds are as per latest fund fact sheets)

    It is evident from the above table that size of the fund portfolio guarantees nothing. A puny fund like Discovery Stock Fund (at Rs 380 m) leads the table over 12 months with a 25.4% appreciation in the net asset value (NAV). On the other hand, the second largest fund in our sample Ė Birla Advantage Fund (at Rs 5,489 m) is the penultimate fund in our study with -22.4% decline over the same period.

    So size could mean nothing after all. However, investors need to take the size into consideration before investing. As we have highlighted, both type of funds have their advantages. Ultimately the investor must decide what he is looking for, and what kind of a fund size best satisfies his investment objective.



    Equitymaster requests your view! Post a comment on "Size matters, or does it?". Click here!


    More Views on News

    The Right Financial Advisor Is Around the Corner (Outside View)

    Mar 10, 2016

    An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.

    Why financial planning should be dull and boring (Mutual Fund Corner)

    Feb 29, 2016

    Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.

    What Are E-Wallets And How To Use Them (Mutual Fund Corner)

    Feb 12, 2016

    PersonalFN highlights the benefits of parking a portion of your expenses in e-wallets and using them efficiently.

    Is Consumption Boom Over In India? (Mutual Fund Corner)

    Feb 2, 2016

    Mutual funds take a bearish call on the FMCG sector. The sector has started playing out due to a combination of slower growth and expensive valuations.

    How to Find a Saint Amongst Sinners? (Mutual Fund Corner)

    Feb 1, 2016

    Ethical practices help build long lasting relationships, and healthy long-term business relationships are often mutually rewarding. But PersonalFN is of the view that the financial services industry in India seems to have forgotten this.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms