Is bigger always better? You may have a sound argument if you say that a bigger car is safer or a bigger hotdog in the bun tastes better. But what about your mutual funds? Does bigger necessarily mean better?
A mutual fund’s growth can allow the managers to increase staff, lower expenses, operate more efficiently, and thus become more profitable for the shareholders. But in certain cases, this run-up has been known to occur too fast. Then managers may have trouble finding good investments for all the new money. And they could be forced to change the focus of the fund, hold more cash, or trade less often.
To keep growing assets from becoming a hindrance to investors’ returns, some fund companies will shut off a fund to new depositors once it reaches a certain size. They might even reopen it after they feel that they are better able to manage new money. However, others firms have resisted closing their ballooning funds and permitted assets under management to expand to a level that could possibly be detrimental to their returns. So when does a fund become too big? The managers’ investment strategy plays a big part.
For example, a fund with low portfolio turnover could deal with a large influx of cash better than one that is constantly struggling to invest quick profits. Or suppose that your small-cap fund recently reported a record-breaking return for the previous year. And new investors have given the managers an extraordinary amount of money to handle. Now your fund’s managers are forced to buy more stocks or larger stocks just to put the cash to work. This move can swiftly change the structure and style of your fund.
If you would like to know whether your mutual funds have reached a size that could drag down future returns, check off and send in the enclosed coupon. Please include the names of your funds.
