Choosing a mutual fund depends on a variety of factors, the first of which is the investor’s appetite for risk. This determines the class of fund to be chosen and the amount to be apportioned to each of these in the investor portfolio. However, after taking into account risk appetite, several common factors determine the choice of a fund and size is possibly one of the most important of these.
Small versus Large Funds
It has been generally observed that a larger fund outperforms smaller funds over time. The primary reason for this is that larger funds have a lower expense ratio and this is turn results in a higher effective rate of return.
This is because when net assets held by a fund are smaller, the expense ratio is higher since expenses have to be met from a smaller asset base. On the other hand, when a larger quantum of assets is held, the expense ratio declines since expenses are met from a broader asset pool.
When Fund Size Becomes a Burden
However, a larger asset pool is not necessarily a virtue for a fund. This is because as the quantum of assets continues to grow, flexibility in terms of adjusting the portfolio may be lost.
As a result even actively managed funds may begin to resemble index funds beyond a point. This is because they hold a larger number of stocks and have become widely diversified. This in turn affects the performance of the fund, since the fund’s rate of return is more or less identical to the market index return. On the other hand, higher fees have to be paid to reward active management of the portfolio.
A larger asset pool can become a major impediment to mutual funds focussing on small cap stocks. These stocks have lower trading volumes. Naturally, it is difficult to enter and exit large positions without affecting prices.
Below we are presenting three mutual funds, each of which have relatively lower quantum of assets under management and have high returns, as well as a Zacks Rank #1(Strong Buy).
Mutual Fund Picks
ProFunds UltraJapan (UJPIX)
Launched in February 2000, this fund has net assets of $55.25 million. The fund aims to deliver results which are twice that of the Nikkei 225 Stock Average. It invests in derivatives which, as a whole, have daily return characteristics which are twice as much as the index. It is a non-diversified fund and has a year-to-date return of 43.42%.
The mutual fund holds 7 securities in all. More than 97% of its assets are invested in Nikkei 225 Cme Fut Jun13. The fund has returned 97.01% over the last one year period. It has a three year annualised return of 20.94% and a Zacks Rank #1(Strong Buy).
RidgeWorth Aggressive Growth Stock A (SAGAX)
This fund has an even smaller pooler of net assets, which amount to $26.01 million and was launched in February 2004. It invests the lion’s share of its assets in common stocks and other domestically traded securities, including ADRs. The fund invests in companies of all sizes and may purchase foreign securities. It has a year-to-date return of 41.40%.
This fund holds a total of 44 securities. It is concentrated around its top 10 holdings, which account for 43.39% of its assets. Its top three assets are Tesla Motors, Inc. (TSLA), Facebook, Inc. (FB) and priceline.com Incorporated (PCLN). The fund returned 44.36% over the last one year period and has a Zacks Rank #1(Strong Buy).
Guinness Atkinson Alternative Energy (GAAEX)
Launched in March 2006, this is the smallest of the funds with net assets of $18.24 million. It invests heavily in domestic and foreign companies from the alternative energy sector. The fund invests in companies regardless of their market capitalisation and may also invest in developing economies. It is a non-diversified fund and has a year-to-date return of 41.30%.
The fund holds 34 assets and its top 10 holdings account for 44.53% of its investments. The asset it is most invested in is SunPower Corporation (SPWR). which makes up 5.59% of its assets. The next two, Vestas Wind Systems A/S and Good Energy Group PLC together make up 9.79% of its assets. The fund returned 50.17% over the last one year period and has a Zacks Rank #1(Strong Buy).
As we can see from these examples, a large asset pool is not always necessary to deliver superior performance. This is why we believe these funds would make excellent additions to your portfolio.
Read the analyst report on UJPIX
Read the analyst report on SAGAX
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