What is AUM in a Mutual Fund? Meaning, Importance & How It Affects Returns

Key Takeaways:
 

• AUM shows how much money a mutual fund manages for investors.
   
• Bigger funds charge less fees but move slowly in markets.
   
• Medium-sized funds work best for most regular investors.

AUM means Assets Under Management in mutual funds. It shows the total money a fund manages for investors.

Example: Let's say ABC Mutual Fund has these investments:
 

• Shares: ₹800 crores
   
• Bonds: ₹150 crores
   
• Cash: ₹50 crores
   
• Total AUM: ₹1,000 crores

This fund manages ₹1,000 crores of investor money.

AUM Impact Table

Different AUM sizes offer distinct advantages and limitations for investors.
 

Medium-sized funds typically provide the optimal balance for most investors.

Large AUM funds spread costs across more investors. This reduces your expense ratio. Small AUM funds cost more per investor. Medium AUM funds offer the best balance. AUM affects how quickly funds buy or sell shares. Bigger funds move markets more when they trade. 

This blog examines how AUM size directly impacts your mutual fund investment costs and returns.

Note: All the companies and data mentioned in the examples are fictional.

1. How AUM Affects Your Investment Costs

PwC reports that global Assets Under Management (AUM) will rise to $145.4 trillion by 2025, driven by growth in passive and alternative investments. Larger funds benefit from economies of scale, reducing expense ratios for investors.

AUM directly impacts your investment costs through expense ratios. Larger funds spread their costs across more investors. This means lower fees for you.

Example: XYZ Equity Fund manages ₹5,000 crores from 50,000 investors. Their total yearly costs are ₹50,00,00,000. Each investor pays ₹1,000 in fees annually. Now, imagine ABC Equity Fund manages ₹500 crores from 5,000 investors. Their costs are ₹10,00,00,000. Each investor pays ₹2,000 yearly.

This comparison demonstrates how fund size affects individual investor costs.
 

Larger funds significantly reduce expense ratios through economies of scale.

Large funds enjoy economies of scale. They negotiate better deals with service providers. Small funds pay higher percentage fees. This directly affects your returns.

2. AUM and Fund Performance Relationship

In 2025, passive funds now account for 25% of global AUM ($36.6 trillion), as investors favour low-cost options. However, active management still dominates at 60% ($87.6 trillion), showing a balance between cost and performance.

AUM size influences how well funds perform. Very large funds face challenges buying good stocks. Very small funds struggle with high costs.

Example: Consider two funds in January 2024. DEF Large Cap Fund has ₹8,000 crores AUM. GHI Large Cap Fund has ₹200 crores AUM. Both want to buy Reliance shares worth 5% of their portfolio.

Two funds with different AUM sizes show varying market impact. 
 

Medium-sized funds balance cost efficiency with trading flexibility effectively.

DEF Fund's large purchase pushes up Reliance's share price. GHI Fund buys at better prices. However, GHI pays a higher percentage of transaction costs. Medium-sized funds often perform best. They balance cost efficiency with flexibility.

3. Different Types of Funds and Their Ideal AUM

Different fund types work best with different AUM sizes. Equity funds need more money than debt funds. Speciality funds perform better when smaller.

Example: Let's compare three fund types and their optimal AUM ranges in 2024

Each fund category requires specific AUM ranges for optimal performance.
 

Matching fund type with appropriate AUM ensures better investment outcomes.

Large-cap funds handle big AUM well. Small-cap funds become inefficient beyond ₹1,000 crores. Debt funds scale easily. Sectoral funds need smaller AUM for better stock selection.

4. How AUM Growth Impacts Your Returns

Private credit AUM surged to $2.1 trillion in 2023, offering high yields. However, firms warn that rapid AUM growth in niche sectors (like infrastructure) may strain returns if not managed carefully.

AUM growth affects your returns in different ways. Growing AUM can boost or hurt performance depending on the fund type.

Example: RST Mid Cap Fund started with ₹100 crores in 2020. It grew to ₹2,000 crores by 2024. Let's see how this affected returns:

This timeline shows how growing AUM affects fund performance.
 

Rapid AUM growth can restrict stock selection in specialised funds.

Early years showed excellent returns with flexible stock picking. As AUM grew, expense ratios dropped. However, the fund struggled to find good mid-cap stocks. Large AUM restricts their investment choices. This shows why rapid AUM growth can hurt specialised funds.

5. Choosing Funds Based on AUM Size

BlackRock’s 2025 outlook highlights that mega forces like AI and infrastructure are reshaping AUM allocation. Investors now prefer thematic funds with clear differentiation, not just size.

Smart investors consider AUM size before choosing funds. Different AUM ranges suit different investment needs and risk profiles.

Example: Three investors with different goals evaluate UVW Balanced Fund with ₹3,000 crores AUM:

Different investor types require funds with varying AUM characteristics.

Matching personal goals with appropriate AUM size optimises investment results.

Fund Selection Guide:

Your investment priorities determine the ideal AUM range selection.
 

Aligning priorities with AUM characteristics ensures optimal fund selection.

Consider your investment timeline and risk tolerance. Match fund AUM to your specific needs for optimal results.

How is AUM Calculated in Mutual Funds?

AUM calculation involves adding all fund investments at current market values. Fund managers calculate the total portfolio worth daily after market closure. They include equity shares, bonds, cash, and other securities held. The calculation uses closing market prices for all holdings. Dividend accruals and interest earnings also contribute to total AUM. This daily calculation ensures accurate fund valuation for investors.

Does Higher AUM Mean Better Returns?

Higher AUM does not guarantee better investment returns for investors. Large funds often struggle with limited stock selection flexibility. They face challenges when buying or selling significant positions quickly. Medium-sized funds typically deliver optimal performance through balanced approaches. Small funds offer agility but charge higher expense ratios. Investors should match fund AUM with their specific investment goals.

Conclusion

AUM size directly affects your mutual fund returns and costs. Choose funds with appropriate AUM for your goals. Large funds offer lower costs. Small funds provide better flexibility. Medium-sized funds balance both benefits perfectly.

Investors must evaluate their investment objectives before selecting funds based on AUM. Conservative investors typically prefer large funds because they provide stability and reduced expense ratios. These established funds handle market volatility better and offer predictable performance patterns. Aggressive investors often choose smaller funds that can capitalise on emerging opportunities quickly. Small funds adapt faster to market changes and select stocks more efficiently.

Medium-sized funds serve moderate investors who seek balanced returns without excessive risks. They combine cost advantages with operational flexibility effectively. Smart investors also consider the fund category when evaluating AUM appropriateness. Equity funds require different AUM considerations compared to debt funds. Regular portfolio reviews ensure your fund selection remains aligned with changing financial goals and market conditions.

Bonus Tip: Check fund AUM before investing to match your investment goals perfectly.

FAQs
 

Q1: What does AUM mean in mutual funds? 

AUM means Assets Under Management - the total money a fund manages.

Q2: Is bigger AUM always better for investors? 

No, medium-sized AUM funds often perform best for most investors.

Q3: How does AUM affect my investment costs? 

Larger AUM funds charge lower expense ratios than smaller funds.

Q4: What AUM size should I choose for equity funds? 

Choose ₹1,000-5,000 crores AUM for balanced cost and performance benefits.

Q5: Can AUM size change my returns? 

Yes, AUM directly impacts fund costs and stock selection flexibility.

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