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Does AUM size matter while selecting MFs?

Henil Shah
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Does AUM size matter while selecting MFs?

Consider a case study of two regular investors in mutual fund schemes. While analysing any particular fund, one of them, places quite a lot of emphasis on the size of the fund while the other is agnostic to the factor of assets under management (AUM). So, whose approach do you think is right? It’s an important question to dwell upon, considering that most investors often find themselves in a conflicting state of opinion when it comes to the role played by the AUM size in mutual fund returns. In this article, we shall find out whether returns really depend upon the AUM size or not? 

 

Study 

In order to understand whether the AUM of the fund defines its returns, we carried out a study wherein, we took equity and debt funds’ AUM along with their one-year, three-year and five-year trailing returns. Given this sample, we found out the correlation between the AUM of equity & debt as an asset class with their respective returns. Further, based on their AUM, we divided equity and debt funds into four quartiles namely, Q1, Q2, Q3 & Q4. With this, we calculated the average one-year returns in each quartile. 

 

 

The above graph shows the correlation between one-year, three-year, and five-year trailing returns with that of AUM. If looked asset class-wise, then we can hardly find any correlation between the funds’ AUM and their ability to perform well. 

 

 

The above graph shows the average one-year trailing returns of equity mutual funds with AUMs falling in their respective quartiles. And here, you would observe that there is no clear pattern. In fact, the average one-year trailing returns of the equity funds falling in Q1, Q3 and Q4 are nearly the same.

However, you can see that the funds falling in Q2 gave the highest returns.

 

 

The above graph shows the average one-year trailing returns of debt mutual funds with AUMs falling in the respective quartiles. And, as we move from Q1 to Q4, the returns seem to be in a falling trend. Though we cannot simply attribute it to the higher AUM, yet, this is likely because of lower expense ratios. Therefore, purely in terms of AUM, there is no pattern that we can witness here. Hence, while selecting mutual funds, it is not at all prudent to invest in a particular fund just because it has a higher or lower AUM. In fact, AUM should be approached from a liquidity perspective. 

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