Is the opposite true from the point of view of an individual investors choosing a fund? You can’t pick a random large fund and say that just because it’s large it must be good. Equally, you can’t pick up a smaller fund with good performance and say that its performance does not matter and you must not invest in it because it’s small. Apart from good performance, there are many variables that can make a fund large or keep it small.
In fact, the marketing prowess of a big fund company or the reach and clout of its parent among fund distributors are the biggest reasons. There can be other factors too. For example, there are a number of equity funds that started out large on Day One because they had hugely hyped NFOs at the peak of the markets. Some of these have turned out be very poor performers but they are still large.
More importantly, it is also the case that there are a number of relatively small equity funds in the fund industry that have displayed good long-term performance and are definitely worth a look. Whenever an investor wants to invest in such a fund, or when an analyst like me praises them, those selling larger funds dismiss the idea contemptuously.
“But you can’t compare a Rs 5,000 crore fund with a Rs 500 crore one!” they protest. This is a red herring. To the investor, it is irrelevant that a fund is small or a fund company does not measure up in the fund industry’s pecking order. If a fund has a good track record and a high rating from Value Research, then size doesn’t matter.
Does that mean that there are no circumstances under which fund size matters? There are, and interestingly enough, size is actually a disadvantage for some types of large equity funds. For example, large funds focussing on small and mid-cap stocks may not be able to find enough stocks that they can invest in. During negative phases of the stock markets, these larger funds may suffer a double whammy of rapidly declining values as well as poor liquidity.
The bottomline is that if you think (or if someone is telling you) that one fund should be preferred over another on the basis of size alone, then that could lead you to make some poor investing decisions