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Equity Mutual Funds With Large AUM - Is Big Better? - Outside View by PersonalFN

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Equity Mutual Funds With Large AUM - Is Big Better?
May 30, 2017

As the S&P BSE Sensex and Nifty 50 continue to move higher, Assets Under Management (AUM) of equity mutual funds, too, is touching new milestones. As on April 30, 2017, the AUM of equity mutual funds crossed Rs 5 lakh crore up by over 40% from Rs 3.50 lakh crore a year ago.

Over the past year, a whopping Rs 75,200 crore flowed in to equity mutual funds (including equity linked savings schemes). Mutual funds in turn bought Rs 66,555 crore worth of stocks. Comparatively, Foreign Institutional Investors (FIIs) put in just Rs 47,832 crore into Indian stocks. Unwittingly, the strong inflow from retail investors is leading on this bull market rally.

Into which mutual fund schemes is this money flowing? Investors tend to chase short-term returns. Hence, schemes that delivered a strong performance in the recent past have been the beneficiaries of this asset inflow.

Top 15 Equity Mutual Funds With The Highest Inflow
Scheme Name 1 Year Return (%) April 2016 Corpus (Cr.) April 2017 Corpus (Cr.) Net Inflow* (Cr.) AUM Growth
SBI BlueChip Fund 17.00 5,624 13,339 6,758 137%
Kotak Select Focus Fund 29.16 4,425 10,270 4,555 132%
Birla SL Frontline Equity Fund 20.46 11,197 16,962 3,474 51%
ICICI Pru Value Discovery Fund 16.23 11,904 17,306 3,469 45%
Axis LT Equity Fund 15.92 8,245 12,916 3,358 57%
HDFC Mid-Cap Opportunities Fund 32.07 10,649 16,685 2,620 57%
DSPBR Micro-Cap Fund 33.76 2,544 5,824 2,421 129%
L&T India Value Fund 35.22 1,125 3,899 2,377 246%
Franklin India Prima Plus Fund 16.81 7,425 10,964 2,291 48%
Birla SL Equity Fund 30.67 2,399 5,287 2,151 120%
Birla SL Advantage Fund 29.11 1,086 3,406 2,003 214%
Franklin India Smaller Cos Fund 28.61 2,799 5,579 1,980 99%
Most Focused Multicap 35 Fund 31.81 3,560 6,543 1,850 84%
Reliance Tax Saver (ELSS) Fund 28.08 4,841 8,045 1,844 66%
Mirae Asset Emerging Bluechip 39.42 1,464 3,769 1,727 157%
S&P BSE 200 20.53        
Nifty 50 17.76        
Data as on May 29, 2016
*The corpus of the scheme is adjusted based on its 1 year performance to estimate the net inflow of assets
Source: ACE MF, PersonalFN Research

As seen in the table above, nearly half the schemes have more than doubled their corpus in the past year. Mutual fund schemes such as L&T India Value Fund and Birla Sun Life Advantage Fund tripled their assets. Apart from their performance, some schemes benefited due to a strong distributor push as well. Hence, schemes of larger mutual fund houses are more prominent in the list, even though their performance over the past year may not be up to the mark.

If we rank the 300-odd schemes as per their latest AUM, the top 30 schemes (the top decile) account for over 56% of the total equity AUM. Over the year, this ratio remained stable, indicating that the AUM is concentrated to only a few well-known schemes. As many as 11 mutual fund schemes have a corpus in excess of Rs 10,000 crore each.

Top 15 Equity Fund Schemes With The Largest AUM
Scheme Name April 2017 Corpus (Cr.)
HDFC Equity Fund 18,585.56
ICICI Pru Value Discovery Fund 17,305.79
Birla SL Frontline Equity Fund 16,961.75
HDFC Mid-Cap Opportunities Fund 16,684.82
HDFC Top 200 Fund 14,312.04
SBI BlueChip Fund 13,338.85
ICICI Pru Focused Bluechip Equity Fund 13,155.67
Axis LT Equity Fund 12,915.63
Franklin India Prima Plus Fund 10,963.74
Kotak Select Focus Fund 10,270.33
Reliance Equity Opportunities Fund 10,013.65
Franklin India Bluechip Fund 8,524.57
Reliance Tax Saver (ELSS) Fund 8,045.25
Most Focused Multicap 35 Fund 6,543.17
ICICI Pru Dynamic Plan 6,449.65
Data as on May 29, 2016
Source: ACE MF, PersonalFN Research

Now with mutual fund assets burgeoning in size, does it make sense to invest in schemes with a large asset base?

Let's go back in time, say five years ago, and list the mutual fund schemes by their AUM as in March 2012. We then work out the forward returns-1-year, 3-year, and 5-year returns. If we analyse this data, it is difficult to conclude if schemes with a larger asset base are either better or worse compared to other schemes with a smaller AUM.

Top AUM Equity Funds V/s Returns
Scheme Name March 2012 Corpus (Cr.) 30/Apr/12 To 30/Apr/13 30/Apr/12 To 30/Apr/15 30/Apr/12 To 30/Apr/17
HDFC Top 200 Fund 11,530 11.02 18.86 15.74
HDFC Equity Fund 10,121 8.73 21.04 16.75
Reliance Growth Fund 5,843 4.19 21.52 18.24
SBI Magnum TaxGain'93 4,697 11.95 23.62 17.30
Franklin India Bluechip Fund 4,625 12.59 18.31 14.99
ICICI Pru Dynamic Plan 4,119 9.24 21.10 17.34
ICICI Pru Focused Bluechip Equity Fund 3,805 13.94 21.02 16.80
UTI Dividend Yield Fund 3,713 8.33 15.35 13.00
Reliance Equity Opportunities Fund 3,340 13.93 24.98 17.34
L&T Equity Fund 3,315 8.61 21.80 16.90
HDFC TaxSaver 3,288 5.02 20.88 17.07
DSPBR Top 100 Equity Fund 3,274 8.08 15.73 13.09
Birla SL Frontline Equity Fund 2,901 20.05 24.20 18.97
Reliance Reg Savings Fund-Equity Plan 2,891 11.03 22.18 18.58
UTI Opportunities Fund 2,814 11.28 19.22 13.32
Benchmark
NIFTY 50 13.00 15.95 12.14
S&P BSE 200 11.80 17.03 13.83
Category Median   11.02 20.35 16.50
Data as on May 29, 2016 Returns over 1 year compounded annualised
Source: ACE MF, PersonalFN Research

As seen in the table above, the schemes with a large AUM may have suffered a bout of underperformance over the 1-year period. However, over the longer term, the performance has recovered. All schemes have delivered a decent alpha over the benchmark.

The common perception among industry experts and some investors is that performance suffers as the fund increases in size due to liquidity constraints. This resulted in the fund managers diversifying their assets over a number of stocks or making a shift towards highly liquid large-caps and larger mid-caps. However, mutual fund houses and their managers will hotly dispute this contention.

There is little evidence to substantiate the claim that fund performance will deteriorate with the growth in the fund's corpus. Hence, judging a mutual fund scheme solely based on its AUM size is rather absurd.

As far as the AUM of mutual fund houses is concerned, PersonalFN is of the view that the size of a mutual fund schemes doesn't tell you anything about its future performance. The key to a fund's performance lies in its investment style, which is also a factor of the fund manager's experience and investment processes followed by the fund house.

It is best to assess whether the AUM growth is causing changes to the investment style. Some changes may be in the interest of the investors and some may not. Act before any changes materialise as a disappointing performance.

Many investors pick schemes solely based on past performance, which may be unachievable with the change in investment style. So, you need to take a deeper look scientifically to pick the best mutual fund schemes for the portfolio. If a fund has changed its investment mandate, you may tone down on your return expectations or just move out.

PersonalFN considers various parameters to rank mutual funds schemes but doesn't consider a large AUM as a barrier for recommending schemes under normal circumstances. At PersonalFN, we follow stringent research processes that focus on both quantitative and qualitative parameters to enable you to select solid schemes that have the potential to generate 'market-beating' returns. Subscribe to our Premium Research Services here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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