Long, Long, Long time ago the biggest mutual fund schemes had about Rs. 700 crores. At that time in its wisdom mutual funds were allowed to fix their charges (as recommended by the holy Amfi to the holy Regulator)..and fees was fixed at a maximum of 2.5% p.a. and 2.25 for equity and debt funds respectively. If I am not wrong this was in the previous century.

We all know that the biggest funds now are about Rs. 17,000 crores in equity itself…so why talk much about debt.

When size increases, %age costs go down (elementary economics, right?). So your audit fees, administrative costs, rent, etc. which were used to justify the 2.5% fees HAVE ACTUALLY FALLEN, correct? and getting 1% on an AUM of Rs. 150,000 crores is lovely for a RISK FREE business, right? Wrong.

The costs have fallen in the big schemes for sure, and you are also paying less (thank yourselves not the amc Рit is just a formula). However the great industry again cried wolf and got the Amc costs increased Рagain nothing to do with performance, just size. You need to remember that India does not have a Dalbar to tell you all this, a Mercer to tell you how much of the returns is because of luck and how much by talent. We do have tons of inside information which allows some fund managers to look smart. A couple of good deals that make the fund manager look like a genius. A continuous flow of SIP funds into under performing funds allowing the fund manager to average all the way down and/ or  push the share up to shore up the NAV.

However into this background bring in the manufacturer’s association which is bothered ONLY about size and never about efficiency. I choose a doctor, architect, lawyer by their reputation NOT BY THE SIZE OF the hospital, building or law firm. How does it matter where my surgeon performs the surgery? I go to him the individual for his brilliance not the hospital where he is going to cut me up.

I have chosen a lawyer by the brilliance that he is – and sometimes when a lot of paper work is to be done, the lawyer suggests a reasonable sized solicitor firm – NOT THE BIGGEST. So if I find a nice small sized firm (if they are around for 15 years and are small it does not impress me)..i choose the FUND MANAGER.

So if costs are not coming down it is because the investors are NOT VOTING WITH THEIR cheque book. Move your money to good performance, not just size.

Good is better than big.

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  1. Hi Subra,
    While agree with your view in-principle, I don’t discount the SIZE. For a layman SIZE represents the achievement and stability. All the funds has grown from some small size to big ones – so in a way it had shown performance (luck or not). And there by stability as well. I couldn’t visibly find a doctor who is extremenly well in a large crowd, so to minimise my search crtieria I look for large hospitals which has the experienced doctors who have performed good number of consultation. Even in financial world, people trade on Large caps most than mid-caps. Size does help in a way, but that alone cannot be used to filter something

    Thanks,
    Rajesh

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