Does fund size impact performance of MF scheme?

While selecting an appropriate mutual fund scheme for investment, the first thing that many of you look for is the past performance of the scheme and the consistency of its performance. Nonetheless, the past performance of the fund itself is dependent on various factors. One of the factors is the size of the fund. So, looking at the size of a fund, can we say anything about its future performance?

There are diametrically opposite views on this. Some analysts point out that there is a clear advantage in large size. As size becomes bigger, more resources for research can be used to cover more stocks. Hence, the fund manager can take small positions in these stocks and generate good winning bets.  It also helps to reduce the overall expense ratio, which impacts the performance of the fund.  However, other analysts believe that large asset size adversely impacts the performance as it increases the trading cost associated with liquidity or price impact.

To understand the implication of size on returns of mutual fund scheme for short duration, we studied 398 mutual fund schemes, excluding index fund and ETFs. Under this, we took the size of the fund in terms of the log of net assets at the end of last month and returns generated by these funds in the next one month. We regressed the returns against the fund size one month back and we found that there is slightly negative relation between fund size and returns generated by the funds. What this means is that as fund size grows, returns may get negatively impacted in the short term. When we did it for the three-month period, we did not find any relation between the size of funds and their returns.

Therefore, asset size can be one of the criteria for selecting a fund, but only for a short duration. Hence, if you are investing for the long term, the size of your fund may not help you much.