Can Large Sized Equity Funds Protect You From Downside Risk?
Sep 24, 2019

Author: Divya Grover

(Image source: Image by David Schwarzenberg from Pixabay)

It is a common belief that bigger is better. The turbulence that has hit the equity market may reinforce that a fund house with a large asset size is more capable of enduring the troubled times. But there is no clear answer as to whether the fund size affects the performance of the scheme. When it comes to mutual fund investments, good things may come in small packages.

When selecting a mutual fund scheme for investment, investors tend to select popular schemes that usually have a large asset size. People flock to these schemes because of its impressive performance in the recent past. Hence the size of these schemes keep increasing as the popularity grows.

Some mutual fund distributors add to the schemes' popularity by advising these schemes so that they need not go through the pain of shortlisting schemes after proper research.

Table: Performance of top 10 schemes in terms of AUM

Scheme Name Corpus as on
August 31, 2019
(Absolute %)
(CAGR %)
(Cr.) 1 year 3 years 5 years
Kotak Standard Multicap Fund 25,385 8.27 11.52 13.81
ICICI Pru Bluechip Fund 21,673 2.92 10.08 10.45
HDFC Equity Fund 21,622 4.95 9.78 8.95
SBI BlueChip Fund 21,483 7.30 8.28 11.40
HDFC Mid-Cap Opportunities Fund 20,944 -3.04 5.99 11.65
Aditya Birla SL Frontline Equity Fund 20,094 3.56 7.71 9.95
HDFC Top 100 Fund 16,842 4.58 9.89 9.03
ICICI Pru Value Discovery Fund 14,959 -6.70 4.28 8.00
Mirae Asset Large Cap Fund 13,946 7.16 12.54 13.11
Motilal Oswal Multicap 35 Fund 12,693 5.03 10.10 15.78
NIFTY 500 - TRI 1.87 9.23 9.24
Data as on September 23, 2019
(Source: ACE MF)

Most of the top 10 schemes (AUM wise) managed to outperform the benchmark in 1-year, 3-year and 5-year period. However, the large AUM does not guarantee that the performance will sustain in the future. Despite being popular, some schemes could not manage to outpace the index even on a longer time frame of 3-year and 5-year.

The top 10 schemes in term of AUM account for nearly 35% of the total diversified equity schemes with a combined corpus of around Rs 1.9 lakh crore.

Among the top 10 funds in terms of AUM size five are large cap funds, while the other schemes in the list too have a large cap bias. Large cap stocks generally have high trading liquidity and that's the reason why it does not erode the performance despite a large asset size of the scheme. Hence, many fund managers with large asset size prefer to hold these stocks.

But if the fund is required to invest across market capitalisation a large asset size may cause constraints as mid and small caps are less liquid. A small AUM size allows fund managers to hold a highly liquid portfolio. They can quickly change the strategy or liquidate holdings in case of changing market conditions or if the manager's bet does not pay off. A large asset size can make it difficult for the fund manager to take active calls during dynamic market conditions.

[Read: Does AUM Size Affect Mutual Fund Performance? Here’s What You Must Know…]

There are many small sized funds that have potential to perform well across market phases and cycles and manage the risk. Unfortunately, these funds remain undiscovered under the shadow of popular large sized funds.

The size of the AUM should not be the lone criteria for the fund selection. You need to assess various factors before shortlisting a scheme.

[Read: Do You Know Lesser Known Funds Can Earn BIG Returns?]

First, you need to stop making investment decisions by relying heavily on the scheme's past performance, popularity, and/or star-ratings. Select the fund that has consistently outpaced the benchmark during a bull run and limited the downside during a bear phase. In addition, it should be able to reward investors for the risk undertaken.

As the fund managers are responsible for the performance of the scheme, it makes sense to check his/her qualification and track record of managing the schemes. The fund manager must not be overburdened with task of managing too many schemes at a time as it can affect the decision making ability.

Focus on the quality of the portfolio by checking that it is not too concentrated or has high churn ratio.

[Read: Why Portfolio Characteristics Of A Mutual Fund Are Very Important]

You should invest in fund houses that are prudent asset managers and not mere asset gatherers. Investing in fund houses that have well-defined investment system and process as well as risk management system in place will enable your investment to grow.

But before you move on to the fund selection process, make sure that you have clearly defined your goals, assessed your risk profile, and determined the investment horizon. Furthermore, you should have a personalised asset allocation plan based on your needs so that you are not exposed to unnecessary risk.

Finally, opt for the systematic investment plan route to mitigate the risk involved with equity investment and benefit from compounding of wealth and rupee-cost averaging.

Editor's Note: If you wish to select the best mutual fund schemes-equity and debt mutual fund schemes --to address your future financial needs, I recommend that you subscribe to PersonalFN's unbiased premium research service, FundSelect.

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Happy Investing!

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