Does Fund Size Affect the Performance of Equity Mutual Funds? An Empirical Study in the Indian Context
D. N. Rao
S. B. Rao
All India Management Association
June 16, 2009
Historical returns, though they do not guarantee future returns and investment objectives often influence investment decisions of investors. Though there may be other factors such as investment style of fund managers, fund size and nature of ownership of Asset Management Companies etc which might affect the performance of funds the investors often ignore as these have been grey areas for them. It has been the dilemma of investors and fund managers whether size affects performance of mutual funds and this issue has been little researched and not much of empirical evidence is available in the literature and hence this study.
The principle of ‘Economies of Scale’ is not an exception to the field of finance and investment. If the fund size is sufficiently large, the Fund Manager would have liquidity, flexibility for timing his investment decisions and stock selection. Further, it gives added advantage of reducing transaction costs due to bulk transactions. The study focuses on empirically researching whether fund size affects performance of open end equity/growth mutual funds in the Indian context.
22 Open end, Equity Mutual Fund schemes having at least three years track record were only considered for the study and the time period chosen is 3 years (1st April 2006 to 1st April 2009). The sample of 22 Equity/Growth Funds have fund size varying from Rs.9.57 crores to Rs. 2472.36 crores and they have been classified as Micro-, Small-, Medium- and Large sized funds.
Correlation coefficients between fund size and the four parameters of performance (Return, Risk, Return/Risk, Sharpe Ratio) have been computed to assess the degree of relationship between fund size and performance of select Equity/ Growth funds. Covariance of Fund size and the four parameters of performance (Return, Risk, Return/Risk and Sharpe Ratio) have been computed to assess how the fund size and each of these parameters move together.
Further, the concept of Momentum (Mass * Velocity), a popular concept in Physics and Mechanics, has been adapted in this study to introduce a new concept called ‘Fund Momentum’ which is computed by the product of Fund Size and CAGR. The Fund Momentum signifies ‘wealth generated’ by the fund for its unit holders if the Fund Momentum is positive, while negative Fund Momentum indicates ‘erosion of wealth’ of the unit holders. Two more new concepts have been introduced in the form of ‘Return per Fund Size Quotient’ and ‘Risk per Fund Size Quotient’ to ascertain the Return and Risk per unit of fund size.
All the performance parameters (Return, Risk, Return per Risk, Return per Fund size Quotient, Risk per Fund size Quotient and Sharpe Ratio) were negative as the Stock Market Return for the period of study (1st April 2006 to 1st April 2009) was negative. From the Hypothesis testing, it is clear that the correlation coefficients of fund size and performance variables are not significant and also the Null Hypotheses were not rejected. There is no conclusive evidence that the fund size affects performance of equity/growth funds, be it micro-, small-, medium- and large sized funds.
Number of Pages in PDF File: 17
Keywords: Equity Mutual Funds, Return, Risk, Return per Risk, Sharpe Ratio, Fund Momentum, Fund Size, Fund Performance
JEL Classification: FEN, MRNworking papers series
Date posted: June 26, 2009
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