Mutual Fund Size (AUM): An Important Parameter Before Investing?

Assets Under Management (AUM) of a mutual fund is the total market value of the assets. Also referred to as the fund size, it refers to the overall value of the capital held by the mutual fund. This includes all the assets invested and the amount of cash possessed by the mutual fund.A fund manager uses this capital to make investment decisions to generate profit for the investor. So is it an essential consideration while evaluating mutual funds?Let’s find out.

Debt funds invest in debt products and generate profit for their clients. Here, a large AUM size can help the fund in managing periodic payments of the dividends. Along with this, a large AUM can empower debt funds to manage their expenses better.The investors get a chance to enjoy a lower expense ratio as compared to another debt fund with a small fund size. And in debt funds, expense ratio can often become the deciding factor amongst debt funds in the same category since the returns are known to be similar.Also, a larger fund size helps the debt fund managers to negotiate better interest rates with debt issuers helping optimise the returns for its investors.

An equity fund's effectiveness can be ascertained by its past performance and efficiency of the fund manager. Since the fund manager needs to invest in equities only, the fund size plays a small part here. However, the expense ratio is lesser for funds with larger fund size.In fact, in some cases, a high AUM can restrict the fund manager’s capability to make sound investment decisions. Let’s further look at three types of equity funds to see the impact of AUM on each of them.

• Small-cap Funds: Small-cap funds invest in companies with small market capitalisation ranked below 250 on the index based on their market capitalisation. A very high AUM with small-cap funds can, in fact, suffocate them. Since small-cap funds invest in small companies, they like to keep their share in the companies less and spread their assets across many small companies. However, holding big positions in a small-cap company can hinder the fund manager from quickly exiting when the market enters a bear phase.
• Mid-cap funds: A mid-cap fund invests in companies with moderate market capitalisation ranked between 101 and 250 as per their market capitalisation. Mid-cap funds or even multi-cap funds are in a better position to manage high AUM.
• Large-cap funds: A large-cap fund invests most of its funds in top 100 companies on the indexes with a large market capitalisation. Here, a large AUM can empower the fund managersto employ the funds in the top-performing companies optimally. However, a key issue associated here is liquidity constraint.

AUM is a crucial parameter that offers key insights about a fund house, as its popularity. However, a large mutual fund size does not indicate the effectiveness of that fund to generate optimal returns. While finalising a fund, you need to be aware of this bias of 'bigger means better'.Along with AUM, look for metrics like the past performance of the fund and the credibility of the fund manager. Together, these parameters offer a clear picture of what you can expect once you invest your money.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.