While small-funds may attract a large portion of the attention of investors, they aren’t the most profitable option in the market. Investors in small funds have to bear the brunt of dismal performances in the market, which is almost always caused by indifference on the part of fund managers. Also, it is not uncommon for small funds to have a small life expectancy as they are often merged with larger funds in no time. Although mergers are done in accordance with the rules and regulations specified by the Securities and Exchange Board of India, they do play a part in confusing and rattling the faith of investors. One also cannot ignore the misconception held by many which states that larger schemes possess a greater chance of performing well in the market as they are the flagship schemes of several mutual funds houses in the country. Large funds are believed to be more profitable than small and mid-cap funds as they bring in more profits to a fund house. These funds also receive greater publicity and hype, which is not much associated to other funds. Also, the management of a fund house charges its funds based on the size of the corpus, and thus, these fund houses are able to derive greater fees from their clients with the help of large funds. Fund managers prefer working with large-cap funds due to its many professional benefits. Investors prefer them due to their low expense ratio.
Small and mid-cap funds do not enjoy as much confidence and support from fund houses, fund managers, or investors as when these funds reach a threshold of an amount as large as Rs. 3,000 crore, it is almost impossible for a fund manager to construct a viable portfolio for clients. In panic, such a fund manager may make investments in large-cap funds, thereby deviating from the entire purpose of the scheme. Small and mid-cap funds also possess the risk of becoming over-diversified in their nature, as they do not invest in more than 8% of a company. It thus makes investments in a large number of organizations, making it difficult for the manager to handle such a fund. Managing their AUMs can also become quite stressful as they possess less liquidity.
Unlike any prudent investors, it is advised that you get all the necessary market information about the particular fund you plan to invest in so that your investments are safe guarded. You obviously do not want to be in a situation where you need to opt for debt like a persona loan, a car loan etc to bridge the gap between your goals and your financial requirements. There will be no point of pursuing the path of investments if the need for opting for debt arises. Therefore to avert yourself from such unnecessary want of credit, invest wisely. Also, it is important for you to understand that, any credit requirement, in order to be fulfilled in future, should be taken care now since any financial dents in your CIR, will definitely create an impact on your financial standing in future. Therefore, make sure that if you ever opt for credit, repay the installments on time and do not default on them. Make sure you religiously pay all your installments.
Thus, if you wish to make investments in small funds with AUMs less than Rs. 100 crore, ensure that the fund has some value-added edge to it. Such a fund house and fund manager must also have an exceptional track record, which will add to your confidence in the fund. Only then take the step of investment as in the market, the concept of ‘small is always good’ does not hold true.