Does Size Matter?

Most mutual fund investors are not bothered by the size of the fund they invest in. In fact, few of them are even aware that funds have a characteristic called size, or that fund size refers to the amount of money that a mutual fund scheme is managing. The few who are aware of this are generally of the opinion that larger is better. I suppose the logic is that if a fund has been given a lot of money to manage then this proves that the fund must be good.Is this true? Not quite. While fund size does matter, it matters for a very different reason. Large equity funds are
difficult to manage in many situations, as the recent travails of India's largest equity fund are in the process of demonstrating. Reliance Natural Resources Fund was launched in January 2008. To be precise, the new fund offer (NFO) opened on January 1, 2008 and closed on 30th January. Thus, it caught the peak (and the tail-end) of the stock markets' bull run. Such was the hype of the times that it collected a huge Rs 5,660 crore during the NFO itself. I rather think that the fund was also helped by the similarity between its name and that of the company Reliance Natural Resources Limited, which is also from the ADA group. This company's stock price went through the roof between September and January.
Anyhow, Reliance Natural Resources Fund was extremely lucky in its timing. It collected a huge amount of money but when the time came to deploy the money, the markets had already crashed. As a result, this fund has not actually deployed a majority of that money. In March, 62 per cent of that huge corpus was being held uninvested instead of being deployed in stocks. In April, this percentage had declined a bit was still at a high 52 per cent. These high cash levels have helped protect this fund from losses while the stock markets were declining. If the timing had been a little different and the fund had deployed the money before the crash, then its investors would have been in a sorry state indeed.However, from now on, a combination of huge size and hesitant markets is going to be a problem. Not deploying the money for long would lead to poor performance if the markets go up but deploying it would lead to poor performance if the markets go up. Sure, this problem exists for all equity funds currently. Nonetheless, when a large high profile fund is hovering at the edge of the psychologically important NAV level of Rs 10, then it's especially acute. As all fund managers and fund marketing men know, it's far worse for your NAV to fall from Rs 10 to Rs 9 than (for example) it is to fall from Rs 20 to Rs 18, even though the investors' losses are the same in both cases. I imagine that having a single digit NAV would rather diminish the bragging rights bestowed by running India's largest equity fund.The big-is-good marketing message is also often extended to fund companies. Fund distributors flogging funds from the larger fund companies like Reliance, ICICI Prudential, UTI and HDFC never fail to mention this fact. The logic is supposedly similar to that of individual funds. If the fund company is big, it must be doing something right. While that is true, that 'something' it is doing right could be just marketing. All in all, size matters, but not always. There are a different set of very real problems that are faced by very small funds and fund companies. However, outside the extremes, it is difficult to see any real evidence of size having any effect on performance. As a positive factor, the size of a fund or a fund company is of relevance to its owners, not to its investors.

(by valueresearch)