South Korea manages the largest number of mutual funds, but their sizes are smaller compared to those under management in overseas countries, data showed Wednesday.

The number of investment funds under operation came to 9,857 at the end of September, topping the list of 44 countries worldwide surveyed by the U.S.-based Investment Company Institute, according to the data compiled by the Korea Capital Market Institute.

But South Korean funds' net assets averaged $28.6 million at the end of September, ranking 39th among the surveyed countries, the data showed.

Luxembourg held the second-largest number of funds at 9,466, but their average net asset stood at $303 million. Brazil and the U.S. each held 7,863 funds and 7,605 funds, with their average net asset at $136 million and $1.88 billion, according to the data.

Market watchers said a large number of funds was created as investors sought after short-term financial instruments that last less than two years, forcing asset managers to continue floating new funds to meet their demands.

"A sharp increase in private equity funds has also offset a decline in the number of mutual funds," said Park Chang-wook, a researcher at the institute.

Private equity funds accounted for 69.4 percent of total investment funds at the end of last year, a sharp rise from 52.1 percent at the end of 2007, according to the researcher.

A smaller fund could generate a short-term strong result but faces the risk of being less diversified, which means that the poor performance of a specific underlying asset could have a large impact on the fund's overall performance, according to the market watchers.

"Smaller funds' operating expenses also usually tend to be higher, which could slash investment return," Park said. (Yonhap News)