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A research done by Kotak Institutional Equities reveals that size of the equity fund has nothing to do with the performance of the fund.
While globally, fund manager’s ability to outperform declines with the increase in fund size, it is not the case in India. The report carried out research across three-year performance of equity funds and found that both size of the scheme and alpha generation do not show any relationship.
On the contrary, the report claims that the size of the scheme has instead helped the fund manager in generating alpha. It said, “There is a mild positive correlation between fund size and alpha. This probably indicates relative fund manager skill is still able to extract excess returns from the market.”
Further, the report says that the Indian mutual fund industry accounts for only 9% of the total equity market size and retail participation is just 8% of the total market capitalisation, which are not so substantial.
It said, “Ownership of the Indian equity market continues to be dominated by promoters (~40% share), followed by foreign participants (FPIs and ADR/GDR; owning 22%). Mutual funds own 9% and retail own 8%. While still low, the participation of mutual funds in the Indian equity market has risen consistently in the past few years (~3X in last decade). There are many variables that could determine the ability to generate alpha by fund managers. Ownership of retail investors (less informed) being as high as mutual funds (more informed) should work in favor of active funds.”
“On the other hand, a large share of promoter (insiders) holding probably hinders the liquidity needed for active managers to fully execute their fundamental views on stocks. This limitation has other crucial implications for the mutual fund industry in its ability to deploy flows (underlying tailwinds of financial inclusion, etc.) in the absence of sufficient market depth. This is even more pertinent for mid-cap and small-cap stocks, given that is one area where active managers have relatively higher potential to add value,” said the report.
