The link between mutual fund size and performance

The growth of mutual funds in India has been remarkable. The total assets managed by these funds have grown tremendously. A good example is PPFAS Flexi Cap, which now manages over Rs 60,500 crore, a nearly 35-fold increase in the last five years. Despite this impressive expansion, some investors worry that the large size of these funds could affect their performance. To understand this, a detailed analysis was done across four mutual fund categories: Flexi Cap, Large Cap, Mid Cap, and Small Cap.

Observations Across Different Fund Categories –

Analysis of Flexi Cap Funds

Flexi Cap funds, which invest across different market sizes, have shown that a bigger fund size doesn’t necessarily mean poorer performance. When we looked at the Flexi Cap category, we focused on funds with at least Rs 10,000 crore in assets that had doubled in size over the past 5 years. Out of the 38 Flexi Cap funds, 8 met these criteria. The largest funds, like Parag Parikh and HDFC Flexi Cap, remained top performers, proving they can manage big assets without compromising returns. This suggests that effective fund management and smart asset allocation can overcome the potential downsides of increased fund size.

Performance of Flexi Cap Funds

Analysis of Large Cap Funds

The size of large cap funds did not appear to significantly impact their performance, according to the analysis of six funds in this category. Larger funds like ICICI Pru Blue-chip Fund consistently ranked among the top performers over the years. This suggests that well managed large cap funds can effectively scale their operations without experiencing a drop in returns. The ability of these funds to maintain performance despite growing assets under management (AUM) may be attributed to their focus on large, liquid blue-chip stocks. These stocks can absorb significant capital inflows without exce­ssive impact on their prices. This challenges the assumption that larger AUM inherently leads to lower returns for large cap funds.

Performance of Flexi Cap Funds

Analysis of Mid Cap Funds

The Mid Cap funds offer an interesting situation. The common belief is that as a fund’s size grows, it becomes harder for the manager to navigate and take advantage of market opportunities effectively. However, the data tells a different story. For instance, the HDFC Mid-Cap Opportunities Fund has an asset size close to some Flexi Cap funds, yet it has consistently outperformed its peers in recent years. This suggests that size, while potentially a factor, does not definitively limit performance. Fund managers can still identify and capitalize on growth opportunities in medium sized companies, even with a larger asset base.

Performance of Mid Cap Funds

Analysis of Small Cap Funds

Small cap funds are known for their potential for high growth, but also high volatility. Size is often seen as a handicap in this category. Yet, some of the largest small cap funds, like Nippon India Small Cap, have consistently delivered top-tier performance. This suggests that even in a less liquid market segment, skilled fund managers can effectively manage liquidity and market impact to overcome the traditional disadvantages of large fund sizes in small cap investing. The success of these large small cap funds shows that size does not have to be a barrier to high performance in this segment of the market.

Conclusion

The analysis indicates that worries about large funds hurting mutual fund performance may be overstated. Despite their substantial size, these funds can still deliver top-tier results. This is because even the biggest funds make up a small portion of the overall market. For instance, a fund with Rs 1 lakh crore in assets constitutes less than 0.3% of India’s total market capitalization. As the market grows, even the largest funds should have plenty of room to operate effectively without compromising their performance.

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