What is mutual fund AUM (Assets Under Management)?
AUM stands for Assets Under Management and is used to measure the size of an investment management company.
As the name suggests, you get the AUM by summing all the assets the entity manages for its clients.
You can have an AUM for a fund house like HDFC, for a mutual fund distributor/advisor like Finpeg and even for individual mutual fund schemes like SBI Bluechip Fund!
When it comes to fund houses and distributors, having a large AUM bases demonstrates a large client base which further demonstrates trustworthiness of the entity.
This is also applicable to individual mutual fund schemes; but, with a caveat.
A large AUM may or may not be desirable. It depends on the type of mutual fund we are talking about.
For a liquid fund, a large AUM is desirable so that the large AUM provides cushioning in case institutional investors decide to flee thereby putting redemption pressures that could hurt returns.
For a small cap fund, on the other hand, a large AUM could hurt returns. The total small cap market cap is pretty small at the bourses. To think of this simply, good apples are selling for Re. 1 and bad apples are selling for Rs. 0.50. However, there are only 50 good apples and 500 bad apples. If I give you are Rs. 10 note you will likely get 10 good apples. But if I give you and 2 more people Rs. 100 each, you and the others will have to settle for bad apples after the good apples are over.
So small cap, as well as mid cap funds, with a very large AUM will generally find it more difficult to generate returns than the small AUM competitors.
For large cap and multi cap funds, large AUM should not be a problem as much as it is for mid cap and small cap funds.
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