Read to know if assets under management or AUM should be a deciding factor when choosing a fund
Time and again we come across the question of whether fund size, also called assets under management (AUM), matters. While some investors like to invest in big funds because they feel they are more likely to do well, there are others who have an opposite view and feel that a fund with a huge AUM may not be able to sustain its performance and it should be avoided.
To answer the concern, whether the size of the fund matters or not actually depends on the type of the fund you are considering. When it comes to equity funds, AUM is not an important factor to be considered. What is more important is the consistent performance of the fund across market cycles and the ability of the fund manager to deliver good returns despite varying AUM.
Moreover, within equity funds, it also depends on whether you are investing in a large-, mid- or small-cap fund. A fund with a huge AUM means that the fund manager will have a higher amount of investors' money to deploy. This in turn means that they would either have to buy large stakes in some of the companies or alternatively, be ready with more investible ideas and opportunities in terms of companies. This usually isn't a problem if a fund is investing dominantly in large-caps, say in case of a large-cap fund or a flexi-cap fund. This is because the companies in the large-cap universe are very huge.
However, this could be a problem in case of small-cap mutual funds. A fund cannot buy large stakes in small companies because if the fund becomes a significant shareholder in the company, it may not be able to sell its stake easily, especially during market falls. Also, large-scale buying in small companies could create 'impact cost', where the fund's buying can significantly move the stock price. Also, it may not be easy and practical for the fund manager to find new companies.
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