The Rs.56,000 crore HDFC Mid Cap Opportunities is the biggest actively managed equity fund in the country. A scheme with a proven track record, its return profile faltered between 2017 and 2021, possibly suggesting that its burgeoning size was inhibiting its performance. However, the fund has made a strong comeback since 2022. It has ranked among the top three performers in the mid-cap category over the past three years. The next big name on the size ladder is Parag Parikh Flexi Cap. This Rs.52,000 crore fund, characterised by its valueconscious investing style and ‘go anywhere’ approach, has been an investor favourite for many years. It has not let its ballooning size dent its performance figures; the fund continues to rank in the top quartile in its category over a three-year horizon. The Rs.48,000 crore ICICI Prudential Bluechip, the biggest large-cap scheme in the country, is another big-ticket offering that has dispelled any concerns over size- led deterioration in its performance. While it went through a lean patch between 2018 and 2020, it has regained its mojo from 2021 onwards. The fund ranks third in its category over a three-year period. It has also comfortably outpaced its index over the past one and three years. HDFC Flexi Cap and Nippon India Small Cap, which boast assets in excess of Rs.40,000 crore, have also starred in their respective categories.
Biggest funds have fetched healthy outcomes
Large corpus did not impact the fund performance.
On this evidence, size appears to be no constraint for performance. To be sure, size was never a concern for large-cap oriented funds, including flexi-cap funds. Given the ample liquidity for frontline stocks, these funds are comfortable absorbing big money flows. Bigger funds in this space are not perceived to be at any disadvantage to smaller peers in terms of ability to manoeuvre the portfolio. However, the bigger mid-cap and small-cap funds are considered vulnerable to size handicap. One, size affects how fund managers take positions in individual bets in this space. When a Rs.1,000 crore small-cap fund wants to bet 5% of its corpus on a company with a market capitalisation of Rs.2,000 crore, it can do so comfortably because the Rs.50 crore outlay is modest relative to the company’s market cap. However, when a Rs.10,000 crore small-cap fund tries to build even a 2% position (worth Rs.200 crore) in the same company, it will prove to be difficult. It will push up the impact cost—the fund’s buying quantum pushes up the stock price—making the investment untenable. Selling it later will also prove equally tricky.
Two, apart from the creamy layer comprising a few quality stocks, not many stocks in the mid-cap and small-cap basket enjoy healthy trading volumes round the clock. Juzer Gabajiwala, Director, Ventura Securities, remarks, “Small-cap funds are constrained by lack of depth in this market segment.” When market conditions deteriorate, liquidity in these counters tends to dry up very fast. This adds to the difficulty in buying and selling when individual positions are bigger. Further, in the absence of good buying opportunities, bigger funds are often forced to park surplus in cash, bet on names from the large-cap universe or spread bets very thin. All of these are considered return dilutive in the long run. Gabajiwala observes that bigger funds in the small-cap category are simply unable to tap opportunities lower down the market-cap ladder. Very few funds venture beyond the top 500 stocks by market cap. If funds sit on cash or invest in large caps, beating the benchmark will prove difficult.
Small- to mid-sized funds in these segments are perceived to be more agile, bearing ability to move in and out of positions deftly. However, bigger schemes like HDFC Mid Cap Opportunities and Nippon India Small Cap are proving that large size is no hindrance to performance. At Rs.44,000 crore, Nippon India Small Cap towers over its peers in size. With a whopping 203 stocks in its bag, it has diversified to the hilt, yet its bulk has not proven dilutive so far. It has ranked second among small-cap funds over the past three years.
Experts reckon that fund size should not be given any importance even within the mid-cap and small-cap space. As long as the fund manager is not diluting the given mandate, a fat corpus should not be seen as a problem. A capable fund manager can deliver results irrespective of the size, insists Kalpesh Ashar, Founder, Full Circle Financial Planners and Advisors. “The proof of the pudding is in the eating. Despite all sorts of theories, no fund has so far come unstuck because of its size,” Ashar adds.
Avoid discriminating among funds based on size. There are several mediocre large-sized funds just as there are many good ones. The same goes for smaller funds. Besides, fund size should be seen in context of total market capitalisation, argues Gabajiwala. If the market size is growing, a fund’s growing asset base can be comfortably accommodated without hurting its manoeuvrability.
