Mutual Fund Size Impact Tool
Introduction
Have you ever thought about Whather Bigger Mutual Funds are Always BetteR?
Mutual funds are the most preferred investment option for growing wealth. But here’s a question, Does a Fund’s size affect how fast it grows,
Today, We’re Focusing on Multi-Cap Funds to find out.
Allow me to share with you what my research say about it. But before that let’s cover the basic.
1. What are mutual funds?
A mutual fund collects money from lots of people Like you and me. It uses that cash to buy stocks, bonds, or other things.
The Net Asset Value (Nav) is the value of One unit of the fund. When we buy mutual funds, we are acually buying these units of the scheme. One unit is basically one share of a mutual fund.
When we say Nav GrowthWe mean how much the value of Nav Increases over time.
We must also also Assets under management (Aum). That’s the total money the fundles. So, A Fund’s Size? It’s all about its aum.
Let’s assume that there are Two Multi-Cap Funds,
- One has Rs.5,000 Crore Aumand
- Another has Rs.50,000 Crore Aum,
The question is, will the bigger one grow slower? It’s not a simple yes or no.
Let’s find out where.
2. Does size affect performance?
I read a research research which was performed on some 68 Equity Mutual Funds form 2007 to 2012,
It split the mutual funds into thee parts:
- Small (Under Rs.200 Crore),
- Medium (Rs.200 Crore to Rs.1,000 Crore), and
- Large (Over Rs.1,000 Crore) Funds.
What did it find?
For things like sharpe’s ratioWhoch Measures Return against Risk, Bigger Funds often Did WorsE. As aum grew, risk-edjusted returns dropped. But there is also a twist, very large funds someimes Had better net returns. Why? Lower costs helped.
Confusing, right?
It’s like saying bigger funds struggle, but not Always. So, let’s dig invto it more to get more class.
3. Why Large Funds Might Struggle
Large Multi-Cap Funds Face Some Real Challenges. You might be surprised how size can act as a disadvantage.
3.1 liquidity
Liquidity is a big one.
Let’s talk about multi-cap funds. They invest in large-, mid-, and small-cap stocks.
It is a provern fat that Quality Small-Cap Stocks Can Grow Really Fast in Long Term as Compared to Large Cap or Mid Cap Stocks,
- But small-cap stock are hard to trade in bulk. Let’s say there is a large mutual fund With Rs.50,000 Crore aum. It can’t easily buy a small-cap store Rs.5,000 Crore (10% of AUM). Why Rs.5,000 Crore? Because this is the type of money available with larges. If they apply so much money to small-cap stocks, excess demand will pushes the price of these stocks up as they start boying. Even when they have deployed say only 1% (rs.50 Crore) of their cash, the stock price will jump too high making it impossible to buy more.
- Smaller Funds Don’t has this headache, they can grab these options (in small caps) Quietly without effecting the share price a lot.
3.2 High Trading Costs when Large Cap Funds Buys
Big Funds FACE Higher Trading Costs. Why?
When Large Mutual Funds Buy or Sell Stocks, they do it in large Amounts – Gradually. As a result, they can shift market prises.
Buying in Bulk Drives Pries UP, and Selling in Bulk Pushes Them Down. This “Market Impact” Increases Expenses Like Brokerage Fees and Taxes.
Smaller Funds Trade With Less Disrupt, preserving more of their returns.
3.3 portfolio dilution
To undersrstand this point, let me expand our previous point.
We’ve seen that bey a mutual funds with very large aum’s may prefer buying large cap stocks like Reliance or HDFC Banks. Why? Because even if Rs.5,000 Crore Worth of Stocks are bought or sold in these stocks, it hardly Effects their stock price (Market Capitalization).
For example, Reliance Industries Market cap is about Rs.19,30,000 Crore. A Rs.5,000 Crore Investment is only 0.25% of its market cap. Hence, even a corpus as big as Rs.5000 cry will hardly effect its price.
In Contract, Say a ‘Large Aum Mutual Fund’ Wants to Buy A Small Stock Like Tanla platformsThe market can of tanla is about Rs.9,000 Crore. A Rs.5,000 Crore Investment is more than Half of the Market Valuation of the company. So, by the time even Rs.500 worth of tanla stocks get bought, its price will soar 15-20% and make it an unviable buy.
So what large cap funds do? They will buy Rs.1 or 2 years old of tanla without disturbing its price. In terms of the total aum of the funds, Rs.1 or 2 Crore holding will not help the Nav Grow Faster.
Now, lets come back to our point about portfolio dilution,
To handle huge aum, managers buy tons of stocks (but from the large cap space). When they do it, the fund starts looking like an index, say like nifty 50. Why? Because most of their holdings are of Premium Large Caps which hare also also in nifty 50 basket.
This phenomenon makes the large cap funds safe, but it will rarely beat the market. If at all they beat, the alpha will be too small. Read more about alpha and beta of investment portfolio,
On the contrary, smaller funds can focus on Fewer, High-Potential Stocks.
3.4 Regulator Rules
SEBI Limits Funds to Owning 10% of a company’s shares.
Large Funds Hit This Cap Fast, Especially in Smaller Stocks. They’re forced to pick less exciting options.
Meanwhile, smaller funds can go all in without these limits.
3.5 Cash Limitation
Big Funds Keep Extra Cash, Sometimes 5-10% of AUM, for Emergencies Like Redemptions.
Cash does not grow like stocks do. Smaller Funds Stay More Invested, Boosting his Nav.
4. So, Should We About Large Cap Funds?
So, Should You Avoid Large Funds? This will be an extreme conclusion.
Here are the points that can work in favor of large Cap Funds which Small Funds May Not Enjoy:
- A Good fund manager can make a differentce. They can dodge these problems with smart movies. Take the parag parikh flexi cap fund, it’s big but still performs well.
- Market Conditions Matter too. In a bull market, large-cap stocks shine, helping big funds. In a bear market, small-caps tank, hurting smaller funds more.
- Big Funds also Save on costsTheir experience ratios are lower, say, 1.82% versus 2.17% for small funds (i get this value from my research). Spreading Fixed Costs Over a huge aum helps. That can better their net returns.
- Sebi’s rules: All Multi Cap Funds Must Invest 25% Each in Large-Cap, Mid-Cap, and Small-Cap Stocks. For large cap funds, this means, they have to compulsorily investment in large caps and mid caps. They can’t just load up on any one cap, even if that are growing fast. It means, no matter how big is the multi-cap fund, 25% will surely go into small cap stocks. This will help them earn higher return in long term.
5. Example: A Real One
Let’s compare two funds. Data from Value Research in 2024 shows this:
- Nippon India Multi Cap Fund: Aum Around Rs.43,400 Crore, 5-Year Return of 15.30%.
- Quant Active Fund: Aum Around Rs.9,930 Crore, 10-Years Return of 19.25%.
The smaller fund beat the bigger one here.
Remember, but it’s not just size, strategy and market trends helped too.
It’s a CLUE, Not A Rule.
Conclusion
So, does a fund with 10x aum grow slower than one with x aum? It might.
Liquidity issues, higher costs, and dilution can slow it down. But a sharp manager or good market can flip the script.
When you pick a fund, size isn Bollywood.
- Check its past returns.
- Look at the manager’s track record.
- Think about what you want (your goal), high growth or steady gains.
It’s fascinating how something like aum can shape performance in Unexpected Ways.
What Matters More to You? Will you chase big returns or stick with a stable giant? Now, I think you have a food for thought. Think about it and then take by decision.
Have a happy investment.
Suggeded, May i request you to use the mutual fund size impact tool for more clarity,
(Tagstotranslate) Investment Tips (T) Mutual Funds (T) Nav Growth