AUM or Asset Under Management is the total money pooled for investment. Though having more money for investment shows the confidence of investors in a mutual fund, money beyond a certain limit might be difficult to manage, as fund manager might find it difficult to have the same opportunitities as he/she had when the AUM of mutual fund was low.
This can be understood if we look into the investment journey of ace investors like Warren Buffet. In the initial phase of his investment, the return of Warren Buffet was high with more than 30 percent annualized growth but with the increase in capital, annualized growth of Warren Buffet reduced. The same applies to mutual fund schemes as well.
On the explanation above, there might be question that few funds perform very well and are generating high returns with large AUM. How is that possible?
To answer this question, many mutual funds stop accepting lumpsum investment when the AUM size grows large to reduce the money inflow, and continue performing. Adding to this, fund manager like Nilesh Shah from Kotak AMC explained in an interview that their flexi cap fund cannot be managed to run like a speedboat due to high AUM.
So, the bottomline is to try having mutual fund with AUM between low to medium size in the category. Having said that, AUM should not be the only parameter for investment decision.