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How does an enormous AUM have an effect on the efficiency of a small-cap fund? Until what stage is it secure to speculate?
-Rajat
Small-cap funds face an issue once they get larger as a result of there is a dearth of concepts. There’s a distinction between managing a small-cap fund and a big cap or a well-diversified fairness fund, just because small caps are very concept intensive. Whenever you have a look at a large-cap fund run by one fund supervisor in comparison with totally different fund managers or an index fund, the overlap of the portfolios can nicely be round 80 per cent as a result of large-cap funds are imagined to spend money on simply the highest 100 corporations. So if it’s a must to select 25 of those 100 corporations to construct a portfolio, 20 of them may be the identical. The opposite benefit of large-cap funds is that one does not want to fret about their liquidity. They’re out there in a lot and do not have a huge effect value even when buyers perform transactions value Rs 100-200 crore in a day. Nonetheless, this will not be the case with a small-cap fund. Many small-cap corporations are normally value about some Rs 1,000-1,500 crore. To purchase a significant place in such an organization, it’s nonetheless okay for a fund managing round Rs 100-200 crore of property. However for a a lot larger fund, taking a 5 per cent place in lots of small-cap corporations is not going to be attainable, and it could additionally not be straightforward to promote these positions once they need to.
So, constructing significant positions in a small-cap fund might get arduous with a rise in property underneath administration (AUM). As soon as a fund will get larger, it has to search for extra concepts. Even the liquidity problem may be handled solely by having extra corporations within the portfolio. However discovering these corporations shouldn’t be straightforward, and discovering a comparatively not-so-richly valued and unspotted small-cap firm takes effort.
Coming to its influence on the efficiency, there’s something known as the ‘winner’s curse’ within the mutual fund area. When a small-cap fund does nicely, buyers pour cash in. Then the larger asset measurement acts as a barrier to efficiency due to the explanations I’ve simply talked about. So if a small-cap fund wins, it’s cursed, and if it does not win, it isn’t being appreciated anyway.
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