SMALL FUNDS, BIG RETURNS

Big mutual fund companies with large asset under management (AUM) dominate our rating chart this year with most 4- and 5-star rated funds coming from these fund houses. However, a few schemes from smallfund houses did spring some surprise by managing to make it to the top grades.

For the purpose of clarification, we have taken an AUM of Rs 5,000 crore as the benchmark. Any fund house with assets below this would be considered small-sized. For individual schemes, an AUM of less than Rs 300 crore is being considered small.

Small funds such as Quantum Long-term Equity, ING Dividend Yield, Sahara Tax Gain and Taurus Tax Shield made it to the list of top funds in their respective categories with consistent performance over 3-5 years.

Quantum Long-term Fund, a 5-star rated fund as per Value Research ratings, has given 18.17% annualised return in the three-year period ending March 31, 2011. Even during the past five years, it has given an annualised return of 17.22%.

ING Dividend Yield Fund, another 5-star fund, has given 20.32% annualised return over the three-year period to March 31, 2011. In the five-year period, it gave a return of 15.45%.

In the tax-saving category, two funds from small-sized funds houses—Taurus Tax Shield and Sahara Tax gain—both 4-star funds—gave a 14% annualised return over the past three years.

Among other schemes from small-sized fund houses, Baroda Pioneer Growth, BNP Paribas Dividend Yield, Sahara Mid-Cap Fund, all 4-star funds, have all given more than 10% annualised return over the past three years.

Since the ratings are based on parameters such as risk-return ratio and consisten- cy, 4- and 5-star ratings to these funds adds to the credibility of their performance over the long-term. However, despite the good performance, these funds have not been able to attract many investors over the years as is evident from their small fund size.

Quantum Long-term Equity was managing Rs 66 crore, while ING Dividend Yield had Rs 50 crore in assets under management till March 31, 2011. Taurus Tax Shield was managing Rs 62 crore, Sahara Tax Gain Rs 11 crore, Baroda Pioneer Growth Rs 60 crore, BNP Paribas Dividend Yield and Sahara Tax gain Rs 11 crore each as on March 31, 2011. Compare this to AUM of some other 5-star rated funds such as HDFC Top 200 (Rs 9,500 crore), Franklin India Bluechip Fund (Rs 3,400 crore) and Fidelity Equity (Rs 3,060 crore).

So should you invest in a scheme that is 5-star rated but does not have enough assets? What are the precautions you should take before investing in schemes of small fund houses?

“Asset size does not play a significant role in the performance of a scheme. In fact, schemes with too large an asset base can pose bigger challenges. An investor should pay more attention to a fund’s investment approach and risk management systems which directly influence the scheme’s ability to deliver superior risk-adjusted returns in the long term,” says Arindam Ghosh, CEO, Mirae Asset Mutual Fund.

Some financial planners and experts, though, differ with Ghosh in their views.

“Before investing in a fund, an investor should look at the philosophy of the fund house, its parentage and the period for which it has been in the business,” says Sumeet Vaid, founder and CEO, Ffreedom Financial Planner.

Experts argue that small asset size can be a big handicap for future performance of a fund. Higher AUM also means better cushion to the investors in case of huge redemptions or market crash.

“The most important benefit that can be passed to investors when the fund size grows is the ability to appoint and retain good fund managers, thereby ensuring highquality fund management. Another benefit would be the reduction in the expense ratio of the fund,”says Swapnil Pawar, chief investment officer, Karvy Private Wealth.

A good rating surely make a strong case for investment in a mutual fund, but there are risks associated with small asset size of a scheme.