An Overview Of Small Sized Funds

An Overview Of Small Sized Funds

16 Aug 2018

An introduction to Fund Houses

A Fund House owns and operates a Mutual Fund. These fund houses float different mutual fund schemes which then pool money from retail / institutional investors to invest. In India, there are around 43 fund houses which together operate around 11,850 schemes. These fund houses are also referred to as Asset Management Companies or AMC’s. Some of the largest ones are - HDFC AMC, ICICI Prudential AMC, Birla Sun Life AMC & SBI AMC.

Fund houses were set up in India by many financial powerhouses like Goldman Sachs, Morgan Stanley, JP Morgan, Fidelity and a few more. They could not make the business viable and thus exited after a few years. But at the same time, a fund house like Quantum continues to thrive since 2006.

To protect the interests of investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. Mutual funds, either promoted by public or by private sector entities, including one promoted by foreign entities, are governed by these regulations.

Although large sized funds continue to be popular with investors at large, there are several small sized funds which are also available which can provide reasonably good benefits.

Benefits of Small Sized funds

  • A larger fund finds it tougher to react quickly to special market situations in terms of buying or selling stocks, which is not the case with smaller funds.
  • Comparatively speaking, a smaller fund with an AUM of around Rs 500 crore will have to buy stocks worth only Rs 10 crore to have 2% of its portfolio in the company. Buying stocks worth Rs 10 crore, naturally, is easier than buying stocks worth Rs 100 crore. The bigger fund might even have to spread its investment over days, which might result in an opportunity loss.
  • A smaller fund would be able to get rid of an underperforming stock much quicker than a bigger fund. A smaller mid-cap fund can definitely perform better than a larger midcap scheme.
  • Many times the ability to frequently churn the portfolio seems to have worked in favor of smaller funds which may have outperformed the larger funds over longer time periods.

This reinforces the point that investors should choose a fund based on its performance across market cycles, investment mandate and management team—not its asset size alone.

Risks associated with Small Fund Houses

Traditionally, big fund houses are able to garner most of the money because of their strong distribution reach and multiple schemes that can easily match the needs of all investors. Notwithstanding the same, there are several smaller fund houses that deliver steady returns to investors with their small schemes.

Many investors are afraid to invest in these funds because of their small size. One of the common held fears is that a small fund house could get taken over. Investors also fear that any recovery pressure in a small sized fund could force the manager to sell some of the better stocks in the portfolio. This could hurt future performance and it is possible that the investors who have not exited can face challenges. Redemption pressure is likely to arise in an equity fund only in case of a steep market correction.

Due precautions need to be exercised before investing in the funds of these small sized fund houses. However, small fund houses may sometimes provide better opportunities than big fund houses also. Necessary due diligence and research needs to be done before investing, otherwise investors might end up investing in a fund which has problems like higher cost of transaction or cash reserve etc.,

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