Assets Under Management: Does It Matter With Mutual Funds?

Are you looking for a multi-option investment? Do you seek inflation-beating returns over the long run? You may consider investing in mutual funds. It helps as the fund manager manages your investment and the research team picks the securities according to the investment mandate. Next, you have the assets under management or AUM, which shows you the size of the mutual fund house. It is the total market value of assets managed by the mutual fund at any given time. Does AUM size impact the performance of mutual funds?

What are assets under management of a mutual fund?

You have assets under management or AUM as the overall market value of assets that a mutual fund holds. It shows you the size and performance of a mutual fund house. For instance, increasing assets under management may indicate a rise in the value of investments or additional funds brought in by new investors. 

However, decreasing assets under management may show poor fund performance or large redemptions from the fund. You may also find the assets under management of an equity mutual fund falling during a bear market. 

In simple terms, AUM shows you the return a mutual fund makes on its investment and also the available capital for a fund manager to make fresh investments. 

How vital are assets under management of a mutual fund?

You may invest in equity funds to achieve your long-term financial goals. However, you could focus on consistent performance across market cycles rather than assets under management. It means the fund must outperform the benchmark and peers during both market highs and lows.

Moreover, you must check the fund manager’s investment style and the ability to deliver higher returns despite varying assets under management (AUM). 

You may gauge the popularity of the equity fund depending on its size. For instance, a fund with large assets under management may have been around for some time. However, past performance won’t guarantee that the fund would continue to do well in the future. 

You have the size of the assets under management as a crucial factor when it comes to debt funds. Because debt funds invest most of the assets in fixed income securities, they typically offer a lower return than equity funds. 

You may pick debt funds with large AUM to distribute expenses over a considerable number of investors. It results in a lower expense ratio which translates to a higher return over time. Moreover, debt funds with large assets under management can negotiate with issuers of debt for better rates, translating to a higher return. 

Should you check AUM when picking a mutual fund scheme?

You may consider checking the AUM of the mutual fund scheme where you plan to invest against similar schemes from other mutual fund houses. However, this is only one parameter, and you must also look at the fund manager’s investment style. 

You have new investors in mutual funds picking fund houses with large assets under management. It may lead to these funds having higher liquidity, and they may handle the sudden redemption pressure by large investors. 

You could consider performance over assets under management when it comes to mid-cap funds and small-cap funds. For instance, you may select funds that have outperformed the benchmark over three to five years. On the other hand, you have cases where fund managers of mid-cap funds and small-cap funds have struggled to deploy assets in suitable investments because of the large assets under management. 

You may pick equity funds based on performance rather than assets under management of the fund. Moreover, you must check the portfolio of the fund and the investment style of the fund manager. In a nutshell, you may pick a mutual fund with significant assets under management after looking at other factors. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in