How do AUM (assets under management) changes impact fund selection?

AUM (Assets Under Management) reflects the total market value of assets a fund manager or mutual fund company manages on behalf of investors. Analysts and investors often use AUM to assess a fund’s size, stability, and potential impact on performance. Changes in AUM can influence fund selection by affecting liquidity, cost structure, and strategy execution.

1. What Is AUM in Mutual Funds?

Assets Under Management (AUM) represent the total corpus invested by all investors in a mutual fund scheme. It is the combined value of all holdings managed by the fund manager. AUM can fluctuate daily based on market performance and investor activity such as inflows or redemptions.

Why AUM Matters:

• It indicates investor confidence in the fund.
• It helps evaluate fund scale and operational efficiency.
• It influences fund costs and expense ratios.

2. How AUM Changes Impact Fund Selection

a) Impact on Liquidity

Larger AUM usually means better liquidity. This is helpful for investors looking to buy or redeem units without impacting the fund’s performance. Small AUM funds may face liquidity constraints during high redemptions.

b) Effect on Expense Ratio

As AUM grows, fixed costs are distributed over a larger asset base, often lowering the expense ratio. Lower expenses can improve investor returns over time.

c) Performance Pressure on Large Funds

Large AUM funds sometimes struggle to deploy capital efficiently, especially in small-cap or mid-cap segments. This can dilute performance if suitable investment opportunities are limited.

d) Fund Manager Flexibility

Small to mid-sized funds give fund managers more agility to move in and out of positions quickly. In contrast, large funds might have to invest in more liquid and broader markets, limiting flexibility.

3. Should You Always Choose High AUM Funds?

Not always. While high AUM often signals investor trust and performance history, it’s not a guarantee of future returns. For instance, in certain market segments like small-caps, too much AUM can become a burden due to limited stock availability.

Instead, fund selection should depend on:

• Fund strategy and category
• Fund manager’s track record
• Consistency in returns
• Expense ratio and portfolio quality

4. AUM Trends and What They Indicate

Rapidly rising AUM can be a double-edged sword. It might reflect positive sentiment, but can also signal overcrowding. Similarly, sharp AUM declines might indicate redemptions due to underperformance or market volatility. Analysts closely track these movements for better insights into a fund's health.

Use AUM as One of Many Filters

Smart investors don’t rely solely on AUM for fund selection. They combine it with other metrics like:

• Sharpe Ratio
• Standard Deviation
• Alpha & Beta
• Rolling Returns

Changes in AUM provide important signals about a mutual fund’s health, investor sentiment, and cost structure. But while evaluating funds, investors should look beyond just size. A well-rounded analysis that includes AUM, fund manager expertise, performance consistency, and portfolio quality is essential. Use platforms like Angel One to compare and select funds based on all these factors and make informed investment decisions.