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1.
Which type of fund tends to be the most threatened by asset growth?
High-turnover small-growth funds. Because large-cap stocks are more liquid and account for the lion's share of the market's value, funds that focus on such names tend to be less affected by size than smaller-cap-focused funds. Low-turnover funds incur lower trading costs and are more affected by asset growth than fast-trading ones.
2.
If you're a mutual fund investor concerned about asset growth, what should you do?
Favor funds with low turnover rates. The less a fund trades, the lower its trading cost. Aggressive, fast-trading funds will only be hurt more by asset growth. And by avoiding all small-company funds, you're missing out on a large part of the market.
3.
Due to their sheer size, large funds tend to be the most threatened by asset growth.
False. Because large-cap stocks account for the lion's share of the market's value, funds that focus on such names tend to be less affected by size than smaller-cap-focused funds.
4.
Why can very large funds have difficulty buying very small stocks?
Because it's tough to put large dollar amounts to work in a small stock without affecting its share price. Small-cap stocks take up less than 10% of the U.S. market's overall assets; large caps, meanwhile, account for about two thirds of the U.S. market. It's therefore easier for a fund manager with a lot of assets to buy bigger companies than to own a small fry.
5.
What is not something funds typically do to handle asset growth?
Own fewer stocks. Funds can close or change their strategies when faced with too many assets, or the fund managers may hold cash or buy more stocks.
