MUMBAI: Does the size of a fund matter when it comes to performance? There are not many instances of small-sized funds outperforming their large-sized counterparts, significantly. But some wealth managers believe that smaller funds tend to do better, because they have the advantage of being able to switch positions without impacting the stock price much.

In most cases, big funds have done better than their smaller peers, plainly because of their long-investment history, often as high as 15 years and more. If you pick out individual examples, funds like Canara Robeco Infrastructure (AUM- Rs 171 crore), Birla Sunlife Infrastructure (AUM- Rs 546 crore) and AIG Infrastructure (AUM- Rs 175 crore) have given more returns than a Tata Infrastructure Fund (AUM- Rs 2,276 crore), UTI Infrastructure (AUM- Rs 1,736 crore) and ICICI Prudential Infrastructure Fund (AUM- Rs 3,988 crore) on a yearly-, and three-yearly basis.

In this case, according to fund researchers, investment history and large asset base have worked against big funds, as their portfolios had more infrastructure companies — some of which are underperforming broader markets — than smaller funds. There are several such stray examples across funds, sectors and investment mandates worth considering for investments.

“Small funds are more nimble than large funds,” said Radhika Gupta, director, Forefront Capital Management.
“They can enter and exit stocks quickly, without having to worry about liquidity issues and the market impact of their large trades,” she added. In contrast, large funds are unable to buy or sell huge chunks of mid-, and small-sized companies, without disturbing the stock price.

“Small funds have not always done well for investors. But then, in a bull market, small pool funds are seen to better than big funds. It is the flexibility of managing small funds that brings higher returns,” said Anand Shah, head-equities, Canara Robeco Mutual Fund, adding, “However, small funds, because of their exposure to mid-caps and small-caps, fall deeper in times of market corrections.”

Apart from investments in big funds, wealth managers are advising clients to have exposure in select tiny fund pools as well. Broadly, because mutual funds are tightly regulated, they come with a base level of safety, however small the size, they say.

“We would focus on evaluating the track record of both the fund and fund houses before advising small schemes to clients. Investors, who don’t have professional help, should evaluate the scheme and fund managers closely before investing,” Ms Gupta of Forefront Capital Management added.

Before investing in a small fund, investors should also know why the fund has small corpus. Stay away from small funds that report inconsistent performance. Funds with asset base below Rs 100 crore are better left alone, say wealth managers.

“Smaller funds have the ability to bring more returns in good markets. But then, these funds could be very volatile in nature. Expenses of managing a smaller fund would be higher than a large-base fund. Investors should only invest in funds that have performed consistently,” said Hiren Dhakan, associate fund manager (fund-of-fund PMS), Bonanza Portfolio.