Fund Size and AUM — Where It Matters and Where It Does Not

Fund size and AUM are the same thing described two ways, so anybody using both terms at you is not describing two different measures. Assets under management is the total value of everything a scheme currently holds. It rises when investors put money in and when the holdings gain value, and it falls on redemptions and on declines.

That is the first reason to be careful with it. A rising AUM is partly a measure of the market having gone up, and partly a measure of how much money arrived after a good stretch. Neither tells you what the scheme will do next.

It sits on the monthly document our page on the fact sheet describes, usually next to the scheme details.

The implied argument is that many people chose it, so it must be good. That is popularity, and popularity in this business tends to follow a strong stretch rather than predict one.

Money arrives after the performance that attracted it. So a very large scheme is frequently one that did well over a period recently enough for people to have noticed, which is the same pattern our page on how to choose a mutual fund warns about.

What size does bring is a degree of operational comfort: costs spread over a bigger base, and enough scale that a scheme is unlikely to be wound up or merged. Those are real and they are modest.

This is the part that matters, and it applies unevenly across categories.

A scheme investing in large companies can put a great deal of money to work without difficulty, because those companies are big enough and traded enough to absorb it. Size is close to irrelevant there.

A scheme investing in smaller companies is a different case. Building a meaningful position takes time, selling one takes longer, and doing either in size can move the price against you. A scheme in that space with a very large AUM has fewer holdings it can realistically use, and may end up holding larger companies than its name implies. Our page on large, mid and small cap funds sets out why that segment behaves this way.

This is why some schemes in that space restrict or stop fresh subscriptions. It is not a marketing decision. It is a fund manager saying the money can no longer be deployed the way the mandate intends.

Very small schemes carry their own issues and they are less discussed because small schemes get less attention generally.

Fixed costs are spread over a smaller base, which can show up in what the scheme charges, as our page on the expense ratio explains. A scheme that stays small for a long time is also a candidate for being merged into another, which our guide on a scheme merging or changing its name covers.

Neither is a reason to avoid a small scheme outright. It is a reason to know why it is small, since a new scheme and a long-neglected one are different situations with the same figure attached.

Two figures get quoted and people routinely mix them up, usually because an advertisement quoted the larger one.

The scheme AUM is what that particular scheme holds. The fund house AUM is everything the company manages across all its schemes, and it is far larger. A fund house being among the biggest in the country tells you nothing about the scheme you are actually considering, which may be one of its smallest.

The fund house figure does say something modest about scale and staying power, and nothing at all about how any individual scheme is run. When somebody quotes a very large number at you, the first question is which of the two they are quoting.

A third figure sometimes appears, which is the average AUM over a period rather than the figure on one date. That version is the more stable of the two and it is the one used in most official reporting.

Here the number carries a different meaning and deserves separate treatment.

Scale can help with the practicalities of holding a spread of instruments. What matters more is the composition of the investor base, because a scheme where a small number of very large investors hold most of the money can face large redemptions at once.

That is a liquidity question rather than a quality one, and it applies more to schemes used for short-term parking than to anything held for years. Our pages on liquid funds and debt funds deal with the risks that actually decide outcomes there, and size is not the main one.

Some, in a specific way, and well below where most people put it.

• In a large company scheme, treat AUM as close to irrelevant.
• In a smaller company scheme, a very large figure is worth a second look at what the scheme actually holds.
• At the very small end, ask why, and check the cost.
• Never treat a large figure as evidence of quality. It is evidence of past inflows.

It is a context number rather than a selection criterion, and it belongs well after horizon, allocation and category, as our page on asset allocation sets out. We are distributors rather than investment advisers and we do not recommend schemes, but if you want help reading what you hold, get in touch.