Does AUM Size Matter?

Investors generally focus on a fund's past returns. They think that a larger fund is better. On the flip side, some investors raise concerns about whether a fund can sustain its strong performance after growing to a substantial size. What is the reality? Rakesh Deshmukh takes a closer look at the scenario

Does size matter? Let's consider a scenario when someone goes to a shop to buy a shirt. Would the customer choose a small size, a perfect size, or an oversized shirt? Well, it depends on the customer's preference and taste, right? They may opt for any of these options if they feel comfortable with them. The question may arise: Does only the brand name matter, even if the size is not perfect? Would you purchase a shirt even if the size doesn't make you comfortable, just because it belongs to your favourite brand? You would not! That's because it would be of no use if you bought it and it doesn't fit or suit you.

Now, taken in the investment context, let us explore the main dilemma of whether AUM size matters. AUM stands for assets under management. It is a financial metric that represents the total market value of all the assets that a financial institution, investment company, or fund manages on behalf of its clients or investors at a specific point in time. AUM includes a variety of assets such as stocks, bonds, cash, and other investment instruments. This metric is often used to assess the size and scale of an investment management business and can be a key factor considered by investors when evaluating funds or financial service providers.

Does Size Matter?

Every fund, when it is launched for the first time, is referred to as an NFO, which stands for new fund offer. In the beginning, it starts with a very small AUM size (not necessary always) but as the public starts recognising and investing in that fund, the AUM begins to grow. The reasons for this growth can vary. It could be because the fund aligns with the current trend, such as small-cap funds being popular at the moment. This may lead to consistent inflows on a month to month basis and the fund starts to perform well compared to its peers.