FAQ: Does a larger asset size affect fund performance?

October 12, 2012 . Vidya Bala

If a fund’s assets under management swells, will that spell trouble for its performance? This is something investors have been wanting to know in light of a marginal dip in performance of some of the top diversified funds.

Large assets don’t always spell trouble. If a fund is a large-cap or diversified fund, then it can deploy the fresh inflows in large stocks that boast of high liquidity, without much difficulty. Simply, put it does not pose much of a challenge to deploy money. In such cases, a large asset base may actually improve your returns as the expenses of the fund is spread over a larger base.

But for funds focussed on the mid and small-cap segment, sudden influx of funds can pose a challenge in terms of deployment. Identifying a sizeable universe of quality mid and small-cap stocks with enough liquidity may not be an easy task for a fund manager. This has to be done without unduly affecting stock’s price movements. Such a task becomes difficult, especially if required to be done in a short span.

Some funds, therefore, resort to the taking exposure to large-cap stocks with high liquidity although their primary objective may be to invest in mid caps. As a result, the high growth style returns delivered by the fund’s mid-cap portfolio, may face the risk of a slowdown in returns as large-caps may not deliver as well as the mid-caps. While this may not always be the case, such slackening performance was evident in funds such as Reliance Growth a few year ago.

It is for this reason mid-cap focussed funds such as IDFC Premier Equity also closed their lump sum investment option from time to time and kept SIPs open to ensure phased inflow of money.

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