Is Small Beautiful When It Comes To Mutual Fund Investment?
Oct 29, 2019

Author: Divya Grover

(Image source: Image by RoboAdvisor from Pixabay)

Every investor wishes to grab the best investment opportunity when investing in mutual funds. A common tendency is to pick popular funds known for their performance and track record. As a result of their popularity, many of these schemes have grown large and they now have a corpus of well over Rs 10,000 crore.

But do you know that certain small sized funds have actually performed better than the large-sized funds?

Most small sized funds (having a corpus of less than Rs 3,000 crore) remain undiscovered despite remarkable performance in the past, as distributors and brokers generally recommend popular large-sized funds.

[Read: Should You Invest In A Mutual Fund Scheme Looking At Its AUM?]

If you look at the 5-year returns of equity mutual funds, around 52% of the schemes delivered double-digit returns. Of these, 59% of the schemes have a corpus of less than Rs 3,000 crore, while 10% of schemes have a corpus of over Rs 10,000 crore.

In fact, the average returns of top 10 small-sized schemes during the 5-year period have been higher than the average returns of top 10 large-sized schemes.

Table 1: Top 10 small-sized schemes based on 5-year performance

Scheme Name Corpus
1 Year
3 Years
5 Years
SBI Small Cap Fund 2,704 12.19 11.49 18.76
Axis Small Cap Fund 1,037 28.01 11.85 14.17
Principal Emerging Bluechip Fund 2,199 11.21 8.20 13.91
Quant Large & Mid Cap Fund 4 10.20 5.35 13.89
Sundaram Large and Mid Cap Fund 794 20.79 12.93 13.52
Invesco India Growth Opp Fund 1,822 18.54 13.50 13.41
JM Core 11 Fund 53 25.87 11.11 13.40
JM Multicap Fund 139 24.64 11.87 13.18
JM Value Fund 124 18.46 8.93 13.04
Parag Parikh Long Term Equity Fund 2,205 15.63 11.36 12.96
1-year return - Absolute, those depicted above 1 year are compounded annualised
Data as on October 25, 2019
(Source: ACE MF)

Table 2: Top 10 large-sized schemes based on 5-year performance

Scheme Name Corpus
1 Year
3 Years
5 Years
Motilal Oswal Multicap 35 Fund 13,235 17.39 9.38 15.36
Kotak Standard Multicap Fund 26,991 18.76 11.02 13.41
Mirae Asset Large Cap Fund 14,917 16.45 11.97 13.01
Aditya Birla SL Equity Fund 11,247 12.40 7.47 11.92
SBI BlueChip Fund 22,743 18.43 8.59 11.48
HDFC Mid-Cap Opportunities Fund 22,025 5.09 4.12 11.03
Nippon India Large Cap Fund 12,531 11.47 10.02 10.37
ICICI Pru Bluechip Fund 23,019 12.13 10.32 10.29
Aditya Birla SL Frontline Equity Fund 20,692 11.51 7.38 9.63
Franklin India Equity Fund 10,762 6.61 5.29 9.30
1-year return - Absolute, those depicted above 1 year are compounded annualised
Data as on October 25, 2019
(Source: ACE MF)

The small size of the portfolio gives the fund manager the scope to actively manage the portfolio and maintain high liquidity. This enables them to time the entry and exit more efficiently, in line with changing market conditions. Large-sized funds, on the other hand, may face liquidity constraints, especially if they have higher exposure to mid and small caps.

[Read: Can Large Sized Equity Funds Protect You From Downside Risk?]

Small fund size does not mean that it lacks growth potential or credibility; it may be positioned to grow leaps and bounds over the long term. Smaller the fund size, the lower its chances of reaching the saturation phase that could have a negative impact on their performance.

Having said that, remember not all small sized funds are valuable enough to add to your portfolio. The basic tenet of choosing mutual funds remains the same: invest in funds that have consistent performance track records. Analysing the fund's performance based on quantitative and qualitative performance is the cornerstone to finding hidden gems.

[Read: How You Can Own Some Hidden Gems In Your Mutual Fund Portfolio]

Many funds struggle to perform well when the markets turn volatile. This makes it important to choose funds that perform well across market phases and cycles and reward investors with superior risk-adjusted returns as compared to benchmark and category peers.

The qualitative factors are equally important as quantitative ones to judge the growth potential and consistency of the fund. Thus, you need to analyse the portfolio characteristics, qualification, skills and experience of the fund manager, the investment systems and processes followed at the fund house, and the efficiency with which the fund house is managing your hard-earned money.

Invest in fund houses that are prudent asset managers and not mere asset gatherers. Additionally, avoid selecting schemes based on its popularity or star-ratings; it is not indicative of future performance.

Make sure that your choice of schemes matches your financial goals, risk profile, and investment horizon. Finally, opt for the systematic investment plan route to mitigate the risk involved with equity investment and benefit from the compounding of wealth and rupee-cost averaging.

If you invest in such hidden gems, in the initial phase when they have not been noticed (yet) by distributors and investors, you may see your wealth multiply substantially in the years to come.

Editor's note: If you think that picking undiscovered funds is a tough task or you lack the time and skills to pick the hidden gems of tomorrow, don't lose heart.

PersonalFN's brand new research report: 5 Undiscovered Equity Funds - With High Growth Potential is meant just for you.

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