Asset Under Management (AUM) refers to the total market value of the investments that a mutual fund manages on behalf of its investors. It includes all the capital received from investors across schemes, including appreciation or depreciation due to market movements. In the Indian mutual fund industry, AUM is a vital parameter that reflects the scale, growth, and performance of a fund house or scheme.
Influence of AUM on Fund Size
▪️ Indicator of Fund Popularity
- A large AUM often indicates that a mutual fund is popular among investors.
- High inflows reflect investor trust, possibly due to past performance or brand reputation.
- Consistently increasing AUM is a sign that a fund is meeting investor expectations.
▪️ Economies of Scale
- As AUM increases, the fixed expenses of fund management get distributed over a larger base.
- This can lead to a lower expense ratio, directly benefiting investors.
- Fund houses may also gain better negotiation power with brokers and other service providers.
▪️ Fund Capacity and Limits
- There’s a limit to how much capital certain strategies (especially small-cap or thematic funds) can effectively handle.
- Extremely high AUM in niche funds may lead to difficulties in deploying capital efficiently.
- This could prompt fund houses to stop accepting new investments (e.g., HDFC Small Cap Fund did this in the past).
▪️ Portfolio Diversification
- With higher AUM, fund managers can diversify across sectors, stocks, and asset classes.
- It allows for risk mitigation and more stable performance over time.
- Large corpus enables participation in new IPOs and less-liquid securities with better control.
Influence of AUM on Investor Confidence
▪️ Psychological Anchor
- Investors often equate higher AUM with safety and reliability.
- “Big is safe” is a common perception, especially for conservative or new investors.
- This perception can fuel a positive feedback loop—higher AUM leads to more inflows, which in turn boost AUM further.
▪️ Trust in Fund House
- High AUM is often a reflection of trust in the fund house’s brand, governance, and track record.
- Funds managed by reputed AMCs (like SBI, HDFC, ICICI Prudential, Nippon India) attract more investors.
- Investor comfort increases when funds are managed by experienced managers with proven expertise and resources.
▪️ Stability in Volatile Markets
- During turbulent times, funds with higher AUM generally show more resilience due to diversified holdings and strategic asset allocation.
- This stability encourages retail and institutional investors to continue or increase investments.
▪️ Credibility in Distribution Channels
- Distributors, RIAs, and bank relationship managers often recommend high-AUM funds, considering them low-risk.
- Third-party platforms also prioritize popular schemes, which further builds investor confidence.
Influence of AUM on Fund Performance
▪️ Positive Effects on Performance
Cost Efficiency
- As mentioned, a larger AUM helps reduce the expense ratio, which can lead to better net returns.
- Passively managed funds like index funds benefit significantly from lower costs due to AUM scaling.
Better Risk Management
- Funds with large AUMs can afford more sophisticated research teams, risk management tools, and data analytics.
- These help in constructing a robust portfolio and minimizing drawdowns.
Ability to Hold Large Positions
- Large-cap and multi-cap funds benefit from having enough capital to take meaningful positions in blue-chip companies.
- This enhances the fund’s ability to deliver benchmark-beating performance.
▪️ Negative Effects on Performance
Diminishing Returns Beyond a Point
- In some cases, a bloated AUM makes it harder to generate alpha.
- Managers may have to spread investments over more stocks, diluting the effect of winning ideas.
Market Impact Costs
- Executing large trades may move prices, particularly in less-liquid segments like small-caps.
- This increases slippage and execution costs, reducing fund performance.
Slower Response Time
- Larger AUM means slower entry and exit from positions.
- Fund managers may be forced to stagger trades over multiple days or weeks.
Style Drift
- To accommodate growing AUM, some funds may drift from their stated objective.
- For example, a mid-cap fund might start adding large-cap stocks, affecting its return-risk profile.
Influence of AUM on Market Perception
▪️ Perception Among Retail Investors
- High AUM creates a perception of success and reliability, attracting more retail participation.
- Morningstar, Value Research, and other rating agencies often highlight AUM in fund comparisons.
- Investors view high-AUM funds as “tried and tested.”
▪️ Perception Among Institutional Investors
- Institutions prefer to allocate funds to schemes with high AUM due to liquidity, credibility, and compliance requirements.
- Sovereign wealth funds, pension funds, and corporates often choose large funds to reduce counterparty risks.
▪️ Influence on AMC Branding
- A fund house managing ₹3 lakh crore AUM is perceived as more credible than one with ₹300 crore.
- AUM helps AMCs attract and retain top talent, win mandates, and negotiate with regulators and stakeholders.
▪️ Impact on Industry Rankings
- AMFI regularly publishes rankings based on AUM, influencing competition among fund houses.
- Investors and distributors use these rankings to evaluate AMC performance.
- Publicly listed AMCs (like HDFC AMC, Nippon Life India AMC) use AUM growth to drive share price appreciation.
AUM Trends in Indian Mutual Fund Industry
▪️ Growth Over the Years
- AUM has grown from ₹1 trillion in 2004 to over ₹55 trillion in 2024.
- Major contributors include SIP inflows, NPS inclusion, B30 city penetration, and regulatory reforms.
- Retail investors now account for nearly 55–60% of industry AUM.
▪️ SIP as a Growth Driver
- Monthly SIP inflows crossed ₹20,000 crore in 2024.
- AUM from SIPs creates stable inflows and predictable cash for fund managers.
- Systematic contributions help maintain and grow AUM during market downturns.
▪️ B30 Cities’ Role
- AMFI’s push in beyond-top-30 (B30) cities added thousands of crores to AUM.
- Regional campaigns and financial literacy drives have played a crucial role.
▪️ Rise of Passive AUM
- Index funds and ETFs now account for over 20% of the industry’s AUM.
- This shift is driven by investor preference for low-cost products and regulatory push.
Regulatory and Operational Aspects of AUM
▪️ SEBI Guidelines
- SEBI requires fund houses to disclose AUM monthly.
- AUM is categorized by scheme type (equity, debt, hybrid) and investor type (retail, HNI, institution).
- Uniform AUM disclosure ensures transparency and comparability.
▪️ AMFI Data Usage
- AMFI uses AUM data to release industry statistics, segment performance, and demographic trends.
- Distributors and investors analyze AUM trends for informed decision-making.
▪️ Compliance and Risk Consideration
- Funds exceeding certain AUM thresholds must meet additional compliance or board oversight requirements.
- SEBI has laid out norms for stress testing, especially for debt schemes with high institutional AUM.
Misconceptions About AUM
▪️ Bigger Is Always Better – Not True
- High AUM doesn’t guarantee better returns.
- Some small or boutique funds have outperformed large funds due to agility and focused strategy.
▪️ Low AUM Equals Poor Quality – Also Not True
- New or niche funds may have low AUM initially but could be high quality in terms of management and performance potential.
- Investors should consider track record, strategy, and risk management, not just AUM.
▪️ AUM Alone Should Guide Investment Decisions – False
- AUM is just one of many metrics—others include rolling returns, Sharpe ratio, standard deviation, and portfolio composition.
How Investors Should Use AUM in Fund Selection
When AUM Is Helpful:
- In evaluating liquidity and stability of the fund.
- To assess if the fund is popular and well-established.
- While investing in index funds or ETFs, higher AUM usually means better tracking and lower tracking error.
When AUM May Be Misleading:
- For small-cap or thematic funds, very high AUM could be a red flag.
- Avoid chasing AUM at the cost of risk-adjusted returns.
- Do not use AUM alone to judge future performance.
Conclusion
Asset Under Management (AUM) is a vital metric in the Indian mutual fund landscape. It reflects the trust investors place in a fund, the scale of its operations, and its ability to manage risk and costs. While higher AUM can lead to several operational and psychological advantages—such as lower costs, stronger brand image, and greater investor confidence—it can also pose challenges like reduced agility, style drift, and performance dilution in certain strategies.
Investors should treat AUM as a supporting factor—not the sole factor—when evaluating mutual funds. It’s essential to look at AUM in combination with other critical parameters such as fund objective, consistency, risk metrics, manager expertise, and investment strategy.
