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31% equity mutual funds manage less than Rs 100 crore. Should you avoid these small funds?

Around 23% of the total schemes have an AUM of less than Rs 50 crore. If we remove the new schemes launched in 2017 or later, we still have 96 schemes which have been there for a while and did not manage to scale up their AUM.

, ET Online|
Last Updated: Feb 14, 2020, 09.53 AM IST
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Around 136 out of 452 (or 31%) of the total equity mutual fund schemes manage less than Rs 100 crore assets. Around 23% of the total schemes have an AUM of less than Rs 50 crore. If we remove the new schemes launched in 2017 or later, we still have 96 schemes which have been there for a while and did not manage to scale up their AUM. In fact, some schemes that have been around for more than a decade figures in the list. Around 25 schemes are so tiny, they manage assets of less than Rs 10 crore. Should you avoid these schemes while shortlisting schemes to invest?

Mutual fund advisors admit that small equity mutual fund schemes face several disadvantages - for the scheme as well for the investors.

Take for instance, a large redemption. A tiny scheme would be badly hit if it faces a large redemption. “Sometimes redemption pressures can be significantly higher for a small amount getting out of the fund. For instance, even 20-25 crore moves out of the fund, it is risky,” says Arun Kumar, Head of Research at FundsIndia.com.

The small AUM can be a handicap for these schemes because most wealth management firms and rating agencies ignore such schemes.

“The rating process of rating firms has a basic cut off for AUM. So, very small funds do not get factored in the rating process of these firms,” adds Arun Kumar. This can hit these funds as they automatically then get out of the recommendation list of most of the wealth management firms.

This industry practice could adversely impact the ability of these schemes to attract new investors and shore up their assets. Mutual fund advisors may not recommend these schemes unless they are rated or recommended by reputed players. So, the schemes may stay small and even the AMC or the fund house would remain tiny.

However, ignoring schemes because of their size could be a mistake. Mutual fund analysts say fund size or size of an AMC alone cannot be the criteria to judge a scheme. They offer several examples of small fund houses and schemes that became the toast of the town later.

“Some AMCs like JM Mutual Fund has had a patchy record and thus do not garner enough investments. But some other AMCs like Quant, Taurus, Sahara, BOI AXA have been there for a while but they have not settled down as a preferred AMC for investors. But fund size cannot be one of the major criteria to choose a good fund,” says Himanshu Srivastava, Senior Analyst, Manager Research, Morningstar.

Srivastava says if it is good, even a small AMC or a small fund can add a lot of value to investors.

“For instance, AMCs like Mirae, Quantum, and Axis, for a long time were small AMCs. But that doesn’t mean that they were offering bad investment options. Axis Mutual Fund, for instance, was launched in 2009 which gained credibility over this small time. Similarly, performance of Mirae’s schemes over the time, across market cycle, has actually enabled it to gain so much prominence in the market that they are now moving to become a large AMC ,” says Srivastava.

Regarding the old schemes that have been around for a decade or so, but still hasn't managed to grow the assets manged, mutual fund analysts believe investors can avoid these schemes as there could be something wrong with these scheme.

“Obviously, if a scheme has been in existence for a long time period, say, over a decade, and it failed to garner enough AUM, there could be something wrong with the scheme’s performance. Investors can leave such schemes,” says Arun Kumar of fundsindia.com.

Mutual fund analysts ask investors not to give unnecessarily high weightage to one factor and always stick to the basics.

“Investors should look at what the scheme is, if matches their risk profile, performance of the fund manager, and the performance of the scheme itself. If the scheme is showing a decent performance, the small AUM should not be a deterrent,” says Srivastava.

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