Saturday, 11 January 2014

Mutual Funds: Size Does Matter...

A mutual fund that is of an extreme size (extremely big or extremely small) should be avoided unless you can give yourself a very good reason as to why you want it.

The extremely large fund:
An extremely big fund will suffer from a host of managerial problems. Its reaction time to market dynamics may not be fast enough. It may not be able to move its resources easily, since regulators often discourage huge transactions in price sensitive markets*.

The large fund manager might end up with too much cash reserve because he might have exhausted all the good avenues - or - he might be forced to invest in opportunities that may not be the best. Or he might be forced to deviate from the founding philosophy of his fund to invest all the extra cash.

With the exception of index funds and bond funds, large funds can be avoided.

(Index funds are passively managed, so the size won't matter really.)

The extremely small fund:
An extremely small fund may be very expensive to maintain.

(to be continued...)

*1. For example, moving INR 1 million in and out of a stock is certainly easier than moving INR 100 million in and out of a stock in the Indian scenario. The regulators have 'circuit breakers' in place.
2. A note on stock circuit breakers.

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