Does AUM matter in choosing mutual fund schemes?

Date : 17/02/2023
Read: 3 mins

Asset Under Management (AUM) refers to the size of a mutual fund. Learn more about AUM, how it works, and whether it affects the performance of mutual funds in this comprehensive guide.

Mutual funds have emerged as the go-to choice for many investors. There were about 14.11 crore mutual fund accounts/folios in India as on December 31, 2022, according to the Association of Mutual Funds in India (AMFI). However, picking a suitable scheme for your goals can still be challenging. There are a number of factors to consider, such as the fund manager, expense ratios, the asset management company (AMC), the type of mutual fund, etc. Some investors also believe the size of the mutual fund can have a considerable impact on its performance. Let's find out whether or not this is true.

How to determine the size of mutual fund schemes?

A mutual fund's size is determined by its Assets Under Management (AUM). AUM is the total market value of all the assets in the mutual fund. A mutual fund's AUM can change daily but is declared by the AMC at the end of every month. The AUM can impact small, mid, and large-cap mutual funds in varying degrees.

Also Read: What Is The Difference Between Actively And Passively Managed Funds?

Impact of AUM on small and mid-cap mutual funds

Assets Under Management (AUM) can significantly impact small and mid-cap funds. When a fund's AUM grows, it can become increasingly difficult for the fund to invest in smaller companies due to their limited market capitalisation and liquidity. As a result, the fund may be forced to invest in larger, more established companies, potentially reducing its exposure to the small and mid-cap segment. This can also drive up valuations of small and mid-cap companies, making it more challenging for the fund to find attractive investment opportunities. On the other hand, if a fund's AUM decreases, it may have to sell shares of its holdings, potentially putting pressure on the prices of mid and small-cap companies and affecting the fund's overall performance.

Impact of AUM on large-cap funds

The AUM does not have any impact on large-cap funds. Large-cap funds may be more stable as these well-established companies are likely ready to weather many market storms. The AUM is no guarantee for their performance. Ultimately, it is the type of fund, the fund manager, and the fund's portfolio that will more or less steer the fund's performance. For instance, some large-cap active funds have performed poorly in front of some large-cap index funds. The differing factor here is not the fund's size but its investment style. Index funds are passive funds that follow a benchmark and mimic its composition, while active funds have a fund manager who makes all investment decisions.

Also Read: Why Are Mutual Fund Managers Focusing On Large-Cap Stocks?

Impact of high AUM on mutual fund investors

The size can impact a mutual fund scheme depending on its type. However, it is not the sole criterion that you should look at or worry about. Therefore, when you pick mutual funds, remember to look at them comprehensively and in alignment with your goals. Check the fund's portfolio and the fund manager's experience. Also, see if the scheme is ideal for your specific investment purpose, then invest.