It is innate of humans to think that big retail chains, big shops, or big media houses offer better services or goods. The logic behind such thought and belief is that businesses tend to become big only when it provides happiness to its customers. This may be true and just as well may not be true.
The above belief is however far from being true when it comes to the area of mutual funds (MF).
Many investors are of the opinion that the size of a mutual fund scheme, i.e., the amount of money managed by a mutual fund house, is an important factor to consider when investing in mutual funds. This however is not true and has no actual basis to stand on. There is no intrinsic cause for a smaller fund to be worse than a larger mutual fund. If a smaller MF as compared to a larger MF of the same category shows better performance and track record, then it is but obvious that investors should opt for the smaller fund.
The reason for the above discussed belief of investors cannot be attributed to just the presumption of ‘big tends to be good.’ Another cause of the belief is the fact that sellers of bigger mutual funds tend to actively promote such notions since it offers them an extra handle to advertise their MF against other funds which may be performing better.
Bigger mutual funds are better: Does it hold any real validity?
A comparison of information available about the performance of varied funds shows that a slightly bigger fraction of larger MFs have better performance as opposed to smaller MFs. This observation is however scattered and quite small. There are several great smaller funds and there are several bad big MFs.
Investors should take extra care to avoid falling into the trap of mistaking reason with effect. Mutual funds which have a track record of good returns over a long period of time generally become bigger due to increased influx of investor funds into them and such cash gets a longer period to increase and grow. They offered good performance and hence they eventually got bigger.
Does ‘smaller mutual funds are better’ hold water?
One cannot just randomly select a big mutual fund and state that it must be good just because it is big. In a similar vein, one cannot select a smaller mutual fund with a good track record and state that its track record does not matter and one should not invest in it due to the fact that it is small. In addition to the performance of a mutual fund, there are several variables that can play a part in making a fund bigger or keeping it small.
The fact of the matter is that the marketing competence of a large fund house or the influence and reach of its parent company among MF distributors are the main reasons. There may be other variables as well. For instance, there are many equity funds which launched big on the first day itself due to their tremendously hyped NFOs at the top of the fund markets. A few these funds have been found to be lacking and give poor performance each year; however, they continue to remain big funds.
It is also important to note that there are numerous comparatively small equity mutual funds in the MF sector which have show good performance over the long term and definitely warrant a perusal. Whenever you think that you would like to invest in this kind of mutual fund, or when praise is heaped on the fund by an analyst, then such an idea is disdainfully dismissed by the sellers of bigger funds.
Sellers of larger funds often argue that comparison of an INR 500 crore fund with an INR 5,000 crore fund is not valid. Such an argument is a trick, a subterfuge. Aninvestors is not concerned about the size of a fund or whether or not a fund house measures up to the pecking order in the fund sector. If a mutual fund has given good returns over a period of time and has high rating from rating agencies, then size is irrelevant.
Does the size of a mutual fund ever matter?
There are many instances when size of a mutual fund does matter. It may also be noted that for some kinds of big equity funds, size can in fact be a disadvantage. For instance, big mutual funds with focus on mid-cap and small-cap shares may find it difficult to gather sufficient shares that they can put their money in. During the negative cycles of the share markets, such larger mutual funds may experience a double negative of poor liquidity and rapidly reducing values.
The key thing to remember is the fact that investors should not select one fund over the other on the basis of just their size, as doing so may result in you making some really bad investment choices.