The Hindu Business Line : Fund Talk

If an open-ended fund’s size remains very small over the years, it indicates the inability of the fund to prove reasonable performance and add to its assets.

I am a retired person who has some exposure to mutual funds. Last year I invested Rs 30,000 in ING Vysya - Select Stocks Fund (dividend option) at an NAV of Rs 18.23 on a cum-dividend basis. I got a dividend of about Rs 8,000 soon after. Th e present NAV of the fund is Rs 15.75.

I just noticed that the asset size of the fund is only Rs 39 crore — which seems very small for a mutual fund. I did not factor this in at the time of investment. I need your opinion and advice on whether asset size of the fund is an important factor for investment and whether to hold or exit my present investment.

V.L. Ranganathan

Considering the fund’s performance in relation to its peer group and also relative to its objectives, we suggest you exit the fund. As mutual fund investors, most of us derive comfort from asset size. It is also generally perceived that a higher asset size in a mutual fund is an indicator of superior performance.

In other words, it is assumed that more investors seek funds that are performing well resulting in bigger asset size for these funds. In the Indian context, performance of a fund cannot be gauged by its asset size; an aggressive sales pitch could also result in huge asset size, as seen in a number of recently launched funds.

However, it is important to take note of the fund size in the context of its nature and investment style. For example, in a mid-cap fund, a larger asset size may pose challenge for a fund manager to deploy the funds in stocks that fit the original investment objective.

For instance, Franklin India Prima was forced to temporarily close fresh inflows last year due to surging asset size. A large size for such a fund may result in sub-optimal investment choices such as investing in large-cap stocks, even though mid-cap opportunities exist. Hence for funds that have a focussed approach or narrow investment universe (as outlined by their objective), a compact size may provide better manoeuvrability.

However, a very small fund size has its limitations. For one, the expenses may eat into the returns as a result of their being spread over a smaller asset base. Two, if an open end fund’s size remains small over the years, it clearly indicates the inability of the fund to prove reasonable performance and add to its assets.

Now coming to ING Vysya Select Stocks Fund, let us first look at its performance in relation to other diversified funds. It has returned 24 per cent over the last one year and yielded slightly lesser than the average returns of diversified equity funds. This means that it has been beaten by several funds in the diversified equity category.

Similarly it has lagged peers over a five-year period and just about kept pace with them over the last three years. Further, it has not managed to beat its benchmark BSE 100 over most horizons, except over a three-year period. This is not an encouraging sign as the ability to outperform the benchmark is the minimum performance measure for a fund.

The fund’s portfolio also reveals that it is quite fragmented with 20 sectors and about 40 stocks. While the fund does not have any specified/narrow objective (as it generally states that it would invest in high quality stocks), a large number of holdings may dilute returns given the asset size of less than Rs 40 crore. A more concentrated portfolio would perhaps have delivered better returns.

The fund has had a very small asset base since in inception. While it has grown over the years, there has clearly been net outflows as growth in assets has failed to keep pace with the NAV growth. As for any recent decline that you may have noticed, it may be due to dividends distributed at 50 per cent in May 2007. The merger of another scheme ING Vysya Equity Fund with this fund, in May 2007 has hardly added to the asset size.

If you wish to deploy the money in other funds, you can consider one of the schemes we have suggested in our accompanying column this week.

VIDYA BALA

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