When we talk about the various considerations that go into selecting a mutual fund, the fund size or AUM is either given too much importance or paid no heed to at all. It’s safe to say, AUM is the least understood of fund selection parameters.
While most investors consider fund size as a major factor, others are often conflicted about its role in Mutual Fund investments. It is vital to have a complete idea about the fund size and AUM of Mutual Funds to invest wisely and profitably and hence, in this article I will cover the basics of AUM and the role it plays in fund selection across mutual fund categories. Read on!
So What Is Fund Size or AUM?
AUM or Assets Under Management refers to the total market value of the assets that are being managed by the mutual fund. Simply put, assets under management or fund size are the overall value of the capital held by the mutual fund in the current market. These underlying assets are managed by an expert called Fund Manager who takes all important decisions regarding the mutual fund on investor’s behalf.
AUM is highly useful when you want to have insights into the fund house and its success. How a fund house has performed as compared to its competitors is also reflected by the size of funds or Assets Under Management. Investors can also get insights into the returns earned by mutual funds by understanding the AUM of a mutual fund. These earning can be utilized in three ways-
- Distributing investors as a dividend
- Reinvesting in securities for further earnings
- Holding as per investment mandate
Either of the three actions depends upon the growth strategy of the fund house and underlying company.
Now the question comes, should you consider Assets Under Management while investing in mutual funds?
This decision depends upon the type and size of the fund you are investing in-
- Equity funds
- Debt funds
- Small cap funds
- Large cap funds
For Equity funds
When you plan to invest in equity mutual funds, the focus should be on how consistent the fund has been in generating returns and how well does it comply with the investment mandates.
AUM can stand at the back foot while investing in equity mutual funds. The consistency of returns is reflected by how well a mutual fund performs during market fluctuations. Thus, an equity mutual fund is considered to be good if it positively generates appreciable and consistent returns irrespective of the fund size or rapport.
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For Debt funds
Debt mutual funds rely highly on their AUM to manage their returns and dividends to investors. A debt mutual fund that has a high fund size or larger assets under management is in a better position to distribute fixed fund expenses across its investors. A large fund size would mean a lower expense ratio per person which in turn gets reflected in the fund returns.
Also, if the fund house has a larger fund size or assets under management, it helps in negotiating better with the debt issuers courtesy the size.
For Mid And Small Cap Funds
The impact of a large AUM affects mid cap and small cap companies. The main reason behind this, is that small cap companies invest in high growth potential companies, which are still growing . Buying and selling of shares in these small yet high growth companies becomes a challenge and impacts the liquidity aspects as well.
Small cap funds have a tendency to restrict cash influx beyond a certain level. Such a situation arises when the assets under management for the given mutual fund rises beyond a certain mark. The primary reason behind this restriction is that a greater fund size would imply that the fund has become a major shareholder in the company leading to restrictions in share trading when the market fluctuates. Also, with a ballooning AUM, the fund manager is posed with the challenge of investing larger amounts in the underlying stocks, however, the restrictions again will make it a tough road to navigate for him. On the other hand, for mid cap companies , the companies in consideration have more liquidity and a growing AUM can be accommodated by the fund managers.
Large Cap Funds
It is a general conception that the larger the fund the better it is but that is yet to be proved. Various large cap funds of varying sizes can be compared to obtain results that reflect that the fund size does not exercise any result on the returns generated by the mutual funds. Even the smallest of the large cap mutual funds, Mirae Asset India Opportunities fund with an AUM of Rs. 4738 Crores has been performing better than the biggest large cap fund, HDFC Top 200 fund with an AUM of Rs. 11,000 Crores. On a general note, large cap funds can easily accommodate high AUM.
Impact Of Higher Assets Under Management On Mutual Funds
On a general note, the mutual fund performance works independently of the fund size and assets under management. There is no universal rule that guides the behavior of a mutual fund as the AUM increases. Different types of mutual funds behave differently with higher assets under management.
The major contributor to a fund’s performance is the skill set of the fund manager who manages the funds by making the right decisions at the right time of entering or exiting a mutual fund. A fund manager is an expert who drives the fund with his abilities and manages to generate appreciable returns even when the markets are fluctuating.
Assets under management serve as a mirror reflecting the overall market capitalization of a mutual fund. Investors should take into consideration several other factors that hold a greater impact on the performance of a mutual fund rather than relying just on the AUM. Assets Under Management are an excellent source to map the popularity of a mutual fund that can have a slight impact on your decision regarding investing in a new mutual fund.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.