Mutual Fund AUM Growth: Impact on Investor Returns

India’s mutual fund industry has experienced substantial growth, with assets under management (AUM) more than doubling over the last five years. This expansion to ₹85 lakh crore brings up an important question for you: can a fund’s large AUM negatively impact its returns?

The success of campaigns like ‘Mutual Funds Sahi Hai’ has boosted retail investor participation, especially through Systematic Investment Plans. Now, let’s look at how some of the largest funds across different categories have performed with their significant AUMs.

Understanding Large-Cap Fund Performance

For large-cap funds, like the ICICI Prudential Large Cap Fund with an AUM of ₹80,960 crore, the picture shows mixed results. It lagged its category and benchmark over one year, but consistently outperformed over longer periods of three, five, and ten years.

Mid and Small-Cap Funds Face Unique Challenges

Mid-cap funds also show a similar pattern. The HDFC Mid Cap Fund, holding an AUM of ₹1,05,143 crore, has delivered strong long-term outperformance despite some short-term underperformance when compared to its category.

Small-cap funds, too, need careful attention. The Nippon India Small Cap Fund, with an AUM of ₹78,957 crore, showed robust long-term gains but also some short-term dips against its peers.

Notably, the Nippon India Small Cap Fund even took action due to its size, limiting fresh subscriptions. From March 22, 2024, the daily SIP or STP limit was reduced to ₹50,000 per PAN.

Even flexi-cap funds can see varied impacts. The Parag Parikh Flexi Cap Fund, managing a substantial ₹1,48,429 crore in AUM, demonstrated strong long-term outperformance but experienced significant underperformance in the past year.

Why Fund Size Matters Differently

Large-cap funds generally handle big AUMs well because large-cap stocks offer high market capitalization and liquidity, making it easier for managers to deploy capital. However, mid- and small-cap funds face a different set of hurdles.

When a mid- or small-cap fund’s AUM becomes very large, managers might have to diversify more than they ideally would, or keep higher cash levels. Both these actions can dilute your potential returns.

Fund managers often respond to these challenges by taking corrective steps, such as restricting new inflows, if they find the AUM size is starting to hinder the fund’s performance.

When you evaluate a fund’s performance, look beyond just the isolated returns. It’s important to consider broader market conditions, the liquidity of the underlying assets, and the overall economic environment to make informed decisions for your investments.