Asset size has little impact on funds' performance

The small relative size of the MF industry's equity assets to the market cap of the country's listed companies means that size is not a drag on performance

The size of a scheme may have little bearing on performance when it comes to Indian mutual funds.

The small relative size of the mutual fund sector's equity assets to the market capitalisation of the country's listed companies means that size is not currently a drag on performance, according to experts.

There is also little difference in returns between the biggest schemes and the smaller ones, according to an analysis by Business Standard.

The 10 largest schemes have outperformed the ten smallest ones over three-month and one-year periods. However, they have underperformed in the three-year and five-year periods, according to data from ICRA Online. The 10 largest ones have average assets of Rs 5,870 crore, while the 10 smallest ones have average assets of Rs 55 crore. The underperformance or outperformance is between one and three per cent.

Dhirendra Kumar, chief executive officer of fund tracker Value Research, suggested that the relatively small size of the mutual fund industry in India allows it to perform irrespective of size, unlike global markets.

"Nobody has achieved that scale so far. If you look at the shareholding pattern and the ownership of mutual funds for Indian companies, these are not very large compared to say, foreign institutional investors or FIIs who play a much larger role," he said.

Niranjan Risbood, Director Fund Research, Morningstar India, says liquidity is not a problem on account of the industry's assets as a proportion of the overall market capitalisation.

"The Indian mutual fund sector's equity AUM is around Rs 1.7 lakh crore, not a large figure when compared to the market valuation of most large-cap stocks. So they are able to take positions in these stocks without too much of an impact," he said.

Mutual funds managed equity assets of Rs 1.65 lakh crore at the end of March, according to data from the Association of Mutual Funds in India. This accounts for 2.2 per cent of India's total market capitalisation of around Rs 75 lakh crore according to an analysis of March-end data from Bloomberg.

This is a far smaller piece of the pie than what mutual funds account for in other global markets, where it varies between 10 per cent for European funds and close to a third of the market capitalisation in the US.

A 2009 paper by D N Rao of Suresh Gyan Vihar University and S B Rao of the All India Management Association concluded the quantum of assets managed did not affect how well the fund performed.

Sundeep Sikka, chief executive officer at Reliance Capital Asset Management, suggests that fund size is not a factor in returns. "It is more about the systems and processes and the nature of fund flows," he says.