1. When Mutual Funds Become Too Big
A mutual fund becoming bigger is usually seen as a good sign. It shows that more investors trust the fund and are putting their money into it. However, a very large fund size can also become a problem. Data from different mutual funds suggests that once a fund crosses ₹50,000 crore in Assets Under Management (AUM), its ability to grow at the same pace may start to slow down. The problem becomes even more noticeable when the fund crosses ₹1 lakh crore.
2. Bigger AUM Can Slow Down Fund Growth
One interesting example is Parag Parikh Mutual Fund. Its AUM was growing at nearly 30% earlier, but after crossing ₹1 lakh crore, its growth rate slowed to just 2%. This shows how difficult it can become for large mutual funds to keep growing at the same speed. The data also compares funds across different AUM sizes, from below ₹5,000 crore to above ₹1 lakh crore. It suggests that many funds start losing some of their ability to deliver strong performance as their size increases, especially after crossing the ₹50,000 crore mark.
3. Why Large Funds Cannot Invest Freely
The main problem is that a bigger fund needs to invest much larger amounts in individual stocks. For example, a fund with ₹10,000 crore in AUM that invests in 20 stocks can put around ₹500 crore into each stock. But if the same fund grows to ₹1 lakh crore, it needs to invest ₹5,000 crore in each stock to maintain the same portfolio size. This creates a major challenge because not every company has enough shares available in the market to support such a large investment.
4. Small-Cap and Mid-Cap Opportunities Become Limited
As a mutual fund grows, it becomes difficult to invest in smaller companies. A fund investing ₹5,000 crore in a company with a market value of just ₹10,000 crore would own a very large part of that business. This can create problems, especially when the fund wants to sell its shares. There may not be enough buyers to exit such a large position easily. Because of this, bigger funds are often forced to focus on large companies with high trading volumes. Their ability to invest in smaller and faster-moving opportunities becomes limited.
5. Fund Size Can Affect Future Performance
As AUM increases, the fund’s flexibility to buy and sell stocks starts reducing. The number of companies in which it can invest also becomes smaller. This can affect its ability to find new opportunities and deliver strong returns. Some fund managers understand this problem and may stop accepting fresh investments when they feel that additional money could hurt the fund’s performance. However, not every fund follows this approach. Some continue collecting money even when their growing size makes investing more difficult.
6. What Investors Should Check Before Investing
Before investing in a mutual fund, investors should look beyond past returns and popularity. Fund size is also an important factor to consider. A fund that performed very well when it was small may find it harder to repeat the same performance after becoming much bigger. However, AUM should not be the only reason to select or reject a fund. Investors should also compare its performance with other funds in the same category. A large fund is not automatically a bad investment, just as a small fund is not automatically a good one. The key is to understand whether the fund’s size is helping or hurting its ability to deliver returns.
