A large corpus indicates investor confidence in a fund scheme, does affect returns in some ways, but it is the only factor
IS THE size of corpus of a mutual fund (MF) scheme a reliable indicator of its selection? Should MF schemes be evaluated on this criterion? Does a larger corpus size lead to better returns and hence prove to be a better investment option?
A large corpus indicates investor confidence. A scheme's corpus may grow due to the fact that it has a good investment process and has delivered consistent performance. The fact that so many people entrust it with their hard-earned money raises confidence on the fund.
But then a smaller corpus could be due to the fact that the fund house is new.
It may come from a parent that is big globally, but is a new entrant in that particular market and, hence, small. Size would not be a good indicator of performance or potential in such a case. Larger corpus funds often have lower costs as expenses get spread over a larger base. However, larger volumes may also make it difficult for the fund manager to manage the fund in an efficient manner. For example, a huge corpus can be detrimental to schemes invested in mid-cap and small-cap stocks. The increasing corpus size ensures large amounts being invested in less liquid midcap stocks. Thus, in the event of a slump in the market, larger schemes may suffer the most. However, funds with bigger corpus funds with bigger corpus are usually more stable in nature.
In comparison, schemes with a small corpus are quite agile and flexible. They can make the best of changing market scenarios by altering the composition of securities held. Therefore, in case of a rising interest rate scenario, small fixed-income schemes can attract new investments and buy papers with high interest rates quickly, thus benefitting investors.
This is what is exactly happening in the market right now. Schemes with a large corpus, that have been around for quite some time, have a portfolio made up of low interest earning securities, which can't be changed quickly. There are many small corpus schemes in the market that are performing quite well and need investor confidence to continue to grow. The amount of asset under management does affect returns in some ways, but it is the only factor. Corpus size is definitely not the ideal indicator of how good the scheme is, as a lot of other factors may also impact its performance.
It is important to see that the factors that made the scheme as large as it is today continue to be present be it favourable economic conditions, experienced fund managers or consistent performance. And, if small schemes of the past became large because of these very factors, then the same can happen to a scheme that is small today?
Invariably, one may find large schemes are large because of star fund managers. A legendary fund owner said, "Star fund managers and star funds, give "star" returns on their way to stardom and not necessarily after they achieved it."
A star that has reached its peak may prove to be less promising than a smaller fund that is a star in the making. The struggler today, when given a chance, may give the best performances on the road to stardom and the reigning stars will have to make way for the new star.
And this cycle shall continue.
