The amount of money invested in a fund does matter, but whether larger is better than smaller depends on the investment objective of the fund. With a large stock index fund, a U.S. government bond fund or a money market fund, the more dollars under management the better. This is because they all operate in very liquid segments of the market where large block transactions are less likely to impact prices—pushing prices up when purchasing and down when selling—and large-scale transactions might prove to be cheaper to accomplish. In addition, large amounts to manage in these funds will not interfere with their investment objective. And, since some fund expenses are fixed, spreading these expenses over more investment dollars should reduce expenses as a percentage of fund assets.
On the other hand, funds with investment objectives that cover less liquid market segments—small stocks or emerging markets—can be too large. That means that individual trades will tend to be larger, which may in turn lead to higher transaction costs tied to security pricing, a wide bid-asked spread on the stocks, and make portfolio changes harder to accomplish. The classic response of funds that focus on small stocks is to migrate investments to mid-sized and large stocks when they start to achieve a large asset base.
Actively managed stock funds, when managers are picking stocks and industries and moving money around, can be flooded with new money and find themselves unable to deploy new money expeditiously or effectively. And a flood of new money usually comes after a performance that garners widespread attention and is often difficult to replicate, particularly with the surge of new investment in the fund. An index fund, passively managed and operating in a liquid segment of the market, would not be stumped by a large, sudden inflow of cash.
How large is large? When it comes to net assets, $100 billion may be just fine for an S&P 500 index fund, but $1 billion may choke an actively managed small stock fund. And beware of funds that had extraordinary performance when they had $100 million or less, a relatively small amount in net assets. In order to invest larger amounts they may have to invest money in more stocks and industries, increasing diversification and decreasing risk, dulling performance.
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