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What's a better option: A big fund or a small fund?

by , 22 July 2013

The universe of funds available to invest in is huge. And knowing where to even start looking is a difficult task. One thing you have to decide is whether you should invest in a big fund or a small fund. Let's have a look at the pros and cons of each…

There’s nothing to say a large actively managed fund will give you a better return than a small one or vice versa.

But when it comes to deciding where to invest your money, the size of a fund could be an important factor, highlight the research team at The South African Investor...

Small funds

The fact that a fund is “small” isn’t a bad thing. Especially if it’s popular, growing and has a reasonable expense level relative to competing products.

In fact, smaller funds are often easier to manage and, in many cases, deliver superior returns.

But if the fund is more than a couple of years old, losing popularity, shrinking in size and charging higher fees than its competitors, then its small size could be cause for concern.

If a small fund is losing investors, there are fewer people to share the fixed costs of running the fund. And the remaining investors will bear the brunt of the higher ongoing fees and poor performance.

If a fund is new to the market, being small should be no surprise. And if the manager has a strong track record in the relevant area of investment, fund size should be of little concern.

Big funds

Bigger funds, meanwhile, seem to be immune from many of the problems faced by smaller funds.

With a higher profile and economies of scale, a bigger fund is often cheaper and better managed than its little cousin.

But if a fund gets too big, it can become much harder to move money around. And a strategy that proved successful when the fund was small could be impossible to implement when the fund gets bigger.

There’s no way of knowing when a fund’s size will start affecting its performance, but the bottom line is this: Size on its own won’t dictate the performance of a managed fund.

In fact, many financial advisers are more concerned about the size and reputation of the fund manager, rather than the size of the individual fund.

Bottom line: As with much of the investing realm, nothing is certain. But by weighing up the different factors facing small and large funds, you can make a more informed decision about where is the best place for your cash.

What's a better option: A big fund or a small fund?
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