Over the past couple of years as the market hit newer highs, most equity mutual fund schemes too have performed well. As retail investors get attracted to star performers, many equity schemes were able to garner a significant corpus as well. As on March 2014, there were just two schemes that commanded a corpus of above Rs10,000 crore. In just over two years, there are now as many as eight equity schemes with a corpus above Rs10,000 crore (as on 29 July 2016). These eight schemes, which have a total corpus of nearly Rs1 lakh crore, account for nearly 25% of the total assets under equity schemes. However, as these equity schemes achieve this milestone, should savers be concerned about their future performance?

If we take a look at the past performance of the schemes, it is clearly visible that schemes such as Axis Long Term Equity, HDFC Mid-Cap Opportunities and ICICI Prudential Value Discovery have done exceptionally well. Over a period when the Nifty 50 and the Nifty Free Float Midcap 100 delivered a compounded annualised return of 9.51% and 12.98% respectively, these schemes delivered an annualised return in excess of 20% each. On taking a closer look at their assets under management, of the eight schemes, these were the only three schemes with a corpus under Rs2,000 crore five years back, as on 30 June 2011.

In contrast HDFC Equity and HDFC Top 200, both star performers at the start of the period, delivered an annualised return under 12%. Both the schemes had a corpus of around Rs10,000 crore at the beginning of the five year period. Does this imply that these schemes were unable to perform because of their large corpus or was it just poor stock selection that led to the lacklustre performance over the past five years? 

As a scheme grows in size, its fund manager may need to shift to large- and mega-cap stocks because smaller stocks cannot be bought in substantial quantities. But, if we take a look at the asset allocation, most of the schemes have a similar allocation to stocks of different cap-sizes as five years ago. A significant change in allocation can be seen in schemes such as HDFC Mid-Cap Opportunities, ICICI Prudential Value Discovery and Reliance Equity Opportunities. There is a significant increase in large-cap stocks for these schemes. However, for the other schemes, the change is just a few percentage points. Hence, just because the size of the fund has increased, there has not been a significant shift in the allocation style of the scheme.

Therefore, it comes down to stock selection.  A year ago we had highlighted here—HDFC Top 200 & HDFC Equity: Choose One—how HDFC Top 200 & HDFC Equity had as many as 37 stocks in common, covering 80% of their portfolios. All the 37 stocks were present in the S&P BSE 200 index and had a combined weightage of over 50% of the index. Not surprisingly, the performance of the schemes is no different from that of the index. As these two schemes became larger in size, they turned in to what the industry calls “closet” indexers.

Therefore, when it comes to picking a scheme, apart from the past performance, it pays to take a look at the stock selection. Just because the corpus of the scheme has grown to a large size, it may not affect performance; at least there is no empirical evidence as of now. However, the quality of stocks surely will.