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
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
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
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. (
(PCLN). The fund returned 44.36% over the last one year period and
has a Zacks Rank #1(Strong Buy).
Guinness Atkinson Alternative Energy
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
(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.
View All Zacks #1 Ranked Mutual Funds
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