Size does matter, sometimes

All offer documents of fund houses run a mandatory declaration: “Mutual funds are subject to market risk. Read the offer document carefully before investing.” But ‘market risk’ per se is not all that the investor should be worrying about, especially those who are investing in an existing fund.

Experts advise one should look at past performance, choice of stocks and the Sharpe ratio (returns to risk per unit), among others.

Other factors such as liquidity, corpus size, average maturity, turnover rates, low expense ratio, load structure should also be kept in mind before finally zeroing in on a scheme. Schemes with higher liquidity, lower average maturity and low turnover rate are preferred.

It is always advisable to select a scheme with a well-diversified portfolio rather than a concentrated portfolio, as it carries lesser risk. Portfolios can be judged on the basis of a company and sector/ industry concentration.

However, there are a lot of equity diversified funds with large corpuses. The question is – does a large corpus limit the fund manager’s ability to give better returns and, therefore, should an investor look at a fund with say, a corpus of less than Rs 1,000 crore?

Though a large corpus denotes investors’ confidence in the scheme, there is a flip-side to it as well. Experts say a huge corpus may not be easy to manage and a fund manager is likely to run out of investment avenues to deploy cash. For example, sometimes arbitrage funds refuse to take more money because they lack investment opportunities.

“If the corpus size is huge, funds tend to underperform the index, and since such schemes invest in more number of stocks, it becomes difficult for the fund manager to track stocks,” said D Sundarajan, chief executive officer, Trendy Investments.

Fund managers, however, feel that a large corpus may limit the performance of a fund, but only in some cases. Sanjay Sinha, chief executive officer, DBS Chola Asset Management Company, said, “The corpus size should not be a material factor for selecting a scheme. Track record and the portfolio of the scheme are important factors."

In case of a large-cap fund or an index fund, experts say, the corpus size is of little importance because large-cap stocks have more liquidity. For instance, the average daily turnover of Reliance Industries and Infosys has been Rs 961 crore and Rs 312 crore (in the last one month), respectively.

But for mid- or small-cap funds, a very big corpus may create problems for the fund manager. For example, the fund manager of a mid-cap scheme with a corpus size of Rs 250 crore would find it easier to invest this money. But if the corpus shoots up to, say Rs 1,000 crore, the fund manager is likely to get stuck because his mandate is to invest in mid- and small-cap companies. And these stocks are quite illiquid.

For example, the average daily turnover of Torrent Power (mid-cap) and South Indian Bank (small-cap) was Rs 22.27 crore and 6.89 crore in the last one month.

Add to it the strict regulation that the scheme cannot invest more than a certain percentage in a single stock can make things more difficult. Rajat Jain, chief investment officer (equity), Principal Mutual Fund, said, “In the mid-cap space, hardly 3-4 per cent of stocks can give really good returns. And, for those schemes with large corpus, it may become difficult to invest in such space.”