What is AUM and should you check it before investing?

Summary: Before investing in a mutual fund, we typically consider factors such as the expense ratio, past performance and net asset value. However, there’s another factor that is equally important – AUM. Here’s how it can impact your fund’s returns.

Mutual funds can invest in a variety of asset classes – stocks, bonds, commodities, etc, based on their fund mandate. The total value of all these investments, along with any cash the fund might keep in reserve, forms the assets under management or AUM.

The AUM can change only due to two reasons:

• If people invest more in the fund or exit it.
• If the value of the underlying assets rises or declines.

If we go by this logic, the better a fund performs, the more people will invest in it. This leads many investors to believe that a larger fund is a consistent performer. Kind of like how more people bet on the best horse at the start of a race. And they believe it will maintain its performance because:

• A fund with a large AUM can devote more resources to investment research. This works in favour of investors.
• The expense ratio of larger mutual funds tends to be lower than that of funds with smaller AUMs.

But this isn't always the case. After all, sometimes an underdog can win. Let's look at the other side and see what they believe.

The sceptics assume that a high-performing mutual fund, as it becomes bigger, will have trouble sustaining its momentum. Also, larger mutual funds can't take big bets on very small companies since it can drive up their stock prices. Also, they can't offload their shares readily because smaller companies have liquidity constraints and the stock may crash.

Suggested read: Fund size does not matter

So, a question that baffles many investors is which funds are better, the larger ones or those with lower AUMs? The short answer is - it actually depends. Yes, we know this isn't a conclusive answer. So, read on to know more!

If a mutual fund invests in large-cap stocks

For funds investing predominantly in large-cap stocks (large companies), such as large-cap and flexi-cap funds, size is not really a matter of concern. These funds invest in big companies that are actively traded. So, liquidity is not a problem here.

If a mutual fund invests in small-cap stocks

Here, it may be easier for a small-sized mutual fund to invest in small-cap stocks. We explained earlier that larger mutual funds can't take big bets on small companies.

Here's an example. Say a company that falls under the small-cap stock category is worth Rs 1,000 to Rs 1,500 crore. So, when a smaller fund with an AUM of Rs 100 to Rs 200 crore plans to invest 5 per cent of its money in that company, it can go ahead and do so because the investment money is not very large.

However, if a large-sized mutual fund with an AUM of Rs 5,000 crore plans to invest 5 per cent of its money in that company, it may not be possible because of the investment size. And even if it is possible, it may have to incur an 'impact cost', where the fund's trading activities can significantly move the stock price. Also, it may not be easy for the fund to sell such a large investment if they plan to exit the investment at short notice.

Moreover, since it's not very practical for large funds to invest a sizable percentage in small-cap stocks, they may need to find more buy-worthy stocks. But finding a quality, unspotted small-cap company is not easy.

This is one of the reasons why small-cap funds often restrict inflows when they are unable to deploy capital. This is because those funds have become too big to invest any more money in their existing small-cap opportunities. Also, they cannot spot new ideas that can scale with the fund.

Suggested read: How does a huge AUM affect the performance of a small-cap fund? 

How big is too big?

There is no mathematical formula to determine at what point the size of the fund becomes too big. But as long as the fund manager is able to continue the investment strategy of the fund, it is fine.

Do keep in mind

The ability of the fund manager, the AMC's track record and the fund's strategy matter more than the size of the mutual fund. A top-performing mutual fund is one that consistently performs well across different market cycles.

This article was originally published on June 28, 2022, and last updated on December 02, 2025.