Assets under Management, also known as AUM, are defined as the total market value of all the assets that are under the management of an AMC or fund house. It is the total value of the capital that is under the management and supervision of a mutual fund house. It is important to have an overall idea of the size of the fund and the assets under management of a fund house to be able to understand its potential.
In this article, we will understand what is fund size in mutual funds, does fund size really matter in different investment options, and how a high AUM affects the performance of the fund.
What is fund size or AUM?
Fund size is the summation of all the assets under the fund's management. It also includes capital invested by individual investors and other institutional investors.
The AUM is managed by fund managers who have considerable experience and a good track record of handling large investments on behalf of investors. Assets under management are also indicative of how a particular fund house fares against its competitors. An investor can learn more about the returns earned by different mutual fund schemes by analysing the assets under management of the fund house.
These earnings or returns can be utilised in three ways: Distributing dividends to investors, reinvesting in securities for additional earnings, or holding funds according to the investment mandate.
Should you consider the AUM before investing in mutual funds?
Whether to consider the AUM before investing in mutual funds depends on several factors, such as:
- What are the financial instruments you wish to invest in?
- Is it equity, debt, small-cap, large-cap, etc.?
Let us understand how it differs for various investment options.
Impact on equity funds
When considering investments in equity mutual funds, you should look at the fund's past performance and the returns it has generated, as well as how it adheres to investment mandates. AUM does not play a huge part when determining equity investments. What the investor should be keen on knowing is how the fund performed during different market cycles. If the fund was able to generate good returns, then it should be considered a good option.
Impact on debt funds
The AUM plays an important role in the case of debt funds. If the debt fund has a huge fund size or a large sum of assets under management, investors should achieve fixed fund expenses. If the fund is large, the expense ratio will be lower for every individual investor. A lower expense ratio means reduced fees, which will result in increased earnings in the returns generated by the fund.
A larger fund size also helps facilitate negotiations to get competitive terms from the issuer of the debt.
Impact on small-cap and mid-cap funds
Small-cap funds invest in companies that are still growing and show promising signs of growth. The process of trading, buying, and selling the shares of companies that are still in the growth stages is very demanding. This can impact liquidity because these funds limit cash inflows once they reach a certain size.
Mid-cap funds typically have a larger number of assets under management and offer more liquidity compared to small-cap funds.
Impact on large-cap funds
It is a common notion among investors that if the assets under management or fund size are larger, they will be capable of generating better returns. However, this theory remains largely unproven, and no such correlation has been proved. Large-cap mutual funds, by definition, can accommodate a fund that has a high AIM.
Advantages of investing in a larger mutual fund
If you decide to invest in larger mutual funds, here are some of the benefits you will derive:
1. Diversification
If a mutual fund is substantial, it offers a higher potential for diversification as compared to a fund which is smaller in size. As the assets under management in large mutual funds are high, they get the chance to invest in a wide variety of securities, thereby reducing risk and increasing the earning potential of the fund.
2. Lower expenses
Larger mutual funds have a high number of investors. As a result, achieving economies of scale is easier for such funds. This, in turn, translates to lower expenses for the investor as they can negotiate for lower fees and other expenses.
3. Higher liquidity
Larger funds typically have more liquidity than funds that are small in size. This helps facilitate relatively easy buying and selling of shares without having a big impact on the price or market value of the fund.
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Impact of higher assets under management on mutual funds
The performance of a mutual fund is often independent of the fund's size or the assets under management. There is no such rule or law that determines that a fund will perform better as the AUM of the fund increases. All mutual funds, despite their size, behave differently under different market conditions.
What matters most for the performance of the fund is the skill set of the fund manager and how efficiently they can take the right calls and judgments of either entering, exiting, or holding on to a fund for better long-term returns. A fund manager is a skilled professional who navigates the fund using expertise to achieve significant returns even amid market fluctuations.
Does the size of mutual fund schemes matter?
No solid correlation has been proven between the size of the fund and its performance. If you take a look at some of the top-performing funds in the market today, you will find that they hold a good mix of small, medium, and large-sized funds.
The important factors that you should be looking at instead are the investment horizon of the fund, the skill of the fund manager who is in charge, past and present performances and returns, expense ratio, and your risk profile.
Conclusion
Understanding the significance of assets under management (AUM) in mutual funds reveals its impact on diversification, expenses, and liquidity. While AUM or fund size can influence certain aspects, like expense ratios in debt funds and liquidity in large-cap funds, it doesn't guarantee better performance across all fund types. The skill of the fund manager, investment horizon, and past performance are crucial factors that outweigh AUM's size in determining the success of mutual fund investments.
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