Despite boom, a third of funds manage less than Rs 100 cr each

25% schemes hold less than Rs 50 crore, making a case for their mergers since costlier for investors

Despite the recent rally in the stock market and robust inflows into equity schemes, one of every three equity schemes in the mutual fund (MF) universe managed assets of less than Rs 100 crore.

Overall, 191 of the 523 equity schemes had assets of less than Rs 100 crore as of May 31, data from Value Research shows. Of these, 139 held assets less than Rs 50 crore and 50 had assets less than Rs 10 crore. The size of these schemes belies the growth seen in several others on the back of record inflow through systematic investment plans (SIPs). Currently, 115 schemes manage a corpus of over Rs 1,000 crore.

According to experts, small schemes come at a higher cost to investors and managing these for a prolonged period can eat into the profits of asset management companies. Several of these schemes are likely to be merged in the future, they said.

“Small schemes come with higher expense ratios, which can eat into returns. Low assets can restrict a scheme’s ability to deploy funds in new opportunities or compel it to sell top-performing stocks in a falling market to meet redemption pressure,” said Vidya Bala, head of MF research at FundsIndia.com. 

A fund house is allowed to charge the maximum expense ratio of 2.5 per cent for the first Rs 100 crore in weekly average net assets of a scheme. The expenses reduce to a minimum of 1.75 per cent for assets over Rs 400 crore.

The 191 schemes under Rs 100 crore predominantly include passive index and exchange traded funds (ETFs), sector funds and international funds. 

Passive funds are not popular in India. Investors prefer schemes overseen by fund managers, due to their ability to beat the returns of the underlying benchmarks. Fund houses recently launched ETFs in the hope of garnering money from the Employees Provident Fund Organisation (EPFO). Several of these schemes are sitting with meagre assets, as EPFO has restricted its investment to ETFs of only two houses, SBI MF and UTI MF. 

Pharmaceutical and information technology funds are going through a rough patch because of the issues facing these sectors. International funds are not in favour because of the relative outperformance of Indian equities in the recent past, as well as the treatment as debt funds for tax purposes. 

Schemes typically have low assets under management because of a long stretch of poor performance or if they come from fund houses that are not popular with investors, said experts. Lack of push from distributors, who typically recommend funds depending on their size or brand name, can also hamper inflow. 

Anand Shah, chief investment officer at BNP Paribas MF, however, believes small size can be an advantage, as a fund manager can move in and out of a stock freely — the buy and sell quantities are small. “Small size might not necessarily impact performance. However, it might become unviable for fund houses to allocate management bandwidth and marketing resources to manage such schemes,” said Shah.

The sustained flow into the MF sector in the past two years by way of SIPs has propelled the assets of several equity schemes into the Rs 10,000-crore club. While only three schemes were part of this club two years ago, 11 schemes now manage assets of over Rs 10,000 crore. 

Experts caution that investment decisions should be based on the track record of a scheme, the fund house's investment philosophy and pedigree of its fund managers, rather than solely on the scheme size.