Currently, there are rules to prevent concentration at the fund level. Each fund must have at least 20 investors and no investor can hold more than 25 per cent of a fund’s assets. But there are no rules to address this imbalance at the debt-fund level.
Now that the regulator has flagged this risk, what should retail investors
do? Should they invest in funds having a larger AUM size, or should they avoid them? Some believe investing in larger-sized debt funds offers concrete advantages.
“Teams at large corporates monitor the funds they have invested in. This makes it unlikely that the fund manager will take unnecessary risks or deviate from his mandate,” says Arun Kumar, head of research, FundsIndia.
In a very small-sized fund of, say, Rs 100 crore, even a Rs 50-crore redemption can have a destabilising impact, while it would cause no concern in a large fund. The fund manager of a small fund has to keep a higher percentage of his portfolio in cash to meet redemption pressure, which can affect his returns. Larger funds also have lower expense ratios. This has a positive impact on returns.
must avoid very small-sized debt funds as it is difficult to build a well-diversified portfolio in them.
Many experts believe that while large corporates should have minimum AUM thresholds, retail investors
need not confine themselves to large-sized funds. In some segments, large size can even pose a problem. “The market is very deep at the shorter end, so even the largest of liquid funds will not face liquidity-related challenges. But effective portfolio management can, under certain circumstances, become difficult for a large fund in some segments, like credit,” says R Sivakumar, head-fixed income, Axis MF.
Rather than AUM, pay heed to other criteria. “In the crises that have taken place since 2008, many of the larger funds have run into trouble and have had to seek liquidity assistance from the RBI. So, more than size, pay heed to the quality and liquidity of the portfolio. Check whether the fund house has proper risk management practices in place and the manager sticks to his mandate,” says Chari.