Does AUM size really matter to equity fund performance?

One common approach among investors is to prefer funds with a larger AUM, as being relatively safer.

Jul 22, 2020 10:07 IST India Infoline News Service

When you look at equity fund performance over five years, what drivesreturns? One common approach among investors is to prefer funds with a larger AUM, as being relatively safer. While that appears to be intuitively correct, does AUM size really impact fund performance?Here is a peek at the categorized 5-year returnsas on July 16, 2020.

Large Cap Funds and the AUM Effect

The table captures the performance of Regular and Direct Plans of Large Cap Funds (5 largest by AUM) over a 5 year period.

Fund Name AUM (Rs crore) 5-Year CAGR (Regular Plan) 5-Year CAGR
(Direct Plan)
5-Year CAGR Benchmark (%)
ICICI Pru Bluechip (G) 23,427 5.53% 6.46% 5.90%
SBI Bluechip Fund (G) 21,437 4.44% 5.51% 5.78%
Birla Frontline Equity (G) 17,143 3.87% 4.81% 5.83%
Mirae Large Cap (G) 16,887 7.35% 8.30% 5.90%
HDFC Top-100 Fund (G) 15,662 3.39% 4.09% 5.90%
Data Source: AMFI

Clearly, there seems to be no link between AUM and performance of large cap funds over a 5-year period. Four of the top five in terms of AUM have underperformed while only Mirae managed to outperform the index over five years.

Multi Cap Funds and the AUM Effect

The table captures the performance of Regular and Direct Plans of Multi Cap Funds (5 largest by AUM) over a 5 year period.

Fund Name AUM (Rs crore) 5-Year CAGR (Regular Plan) 5-Year CAGR (Direct Plan) 5-Year CAGR Benchmark (%)
Kotak Stand Multicap (G) 28,792 6.89% 8.03% 5.55%
HDFC Equity Fund (G) 18,554 2.52% 3.33% 5.44%
MOSL Multicap 35 (G) 10,907 5.52% 6.47% 5.44%
Birla Sun Life Equity (G) 10,526 5.84% 6.89% 5.36%
UTI Equity Fund (G) 10,093 6.17% 6.70% 5.44%
Data Source: AMFI

Kotak Multicap appears to have clearly outperformed the relevant index in this segment. However, HDFC Equity Fund has grossly underperformed the index. In the case of the others, the outperformance is marginal and is more due to the lower costs of Direct Plans.

Mid Cap Funds and the AUM Effect

The table captures the performance of Regular and Direct Plans of Mid Cap Funds (5 largest by AUM) over a 5 year period.

Fund Name AUM (Rs crore) 5-Year CAGR (Regular Plan) 5-Year CAGR (Direct Plan) 5-Year CAGR Benchmark (%)
HDFC Mid Cap Opp (G) 20,066 4.60% 5.66% 3.06%
DSP Mid Cap Fund (G) 7,090 7.72% 8.63% 3.06%
Kotak Emerging Equity (G) 6,640 6.12% 7.55% 3.06%
Nippon India Growth (G) 6,256 4.09% 4.83% 4.76%
Franklin India Prima (G) 6,1773 4.07% 5.11% 6.09%
Data Source: AMFI

In the case of mid cap funds, AUM size appears to have a positive effect. The top 3 funds in terms of AUM have managed to beat the benchmarks comfortably. In the case of Nippon and Franklin, it appears more of stock selection issues.

Small Cap Funds and the AUM Effect

The table captures the performance of Regular and Direct Plans of Small Cap Funds (5 largest by AUM) over a 5 year period.

Fund Name AUM (Rs crore) 5-Year CAGR (Regular Plan) 5-Year CAGR (Direct Plan) 5-Year CAGR Benchmark (%)
Nippon Small Cap (G) 8,070 6.63% 7.77% 2.57%
HDFC Small Cap (G) 7,677 4.32% 5.61% -2.21%
Franklin Small Cap (G) 5,089 0.48% 1.65% -0.41%
L&T Emerging Fund (G) 4,733 4.91% 5.86% 2.57%
DSP Small Cap (G) 4,533 3.58% 4.27% 2.57%
Data Source: AMFI

In case of 4 of 5 funds, size has meant outperformance, although the index itself appears to have grossly underperformed. Here again, like in the mid-cap case, Franklin Fund appears to have some stock selection issues, wherein 5-year returns are just in positive territory.

ThematicFunds and the AUM Effect

The table captures the performance of Regular and Direct Plans of Thematic / Sectoral Funds (5 largest by AUM) over a 5 year period.

Fund Name AUM (Rs crore) 5-Year CAGR (Regular Plan) 5-Year CAGR (Direct Plan) 5-Year CAGR Benchmark (%)
SBI Magnum Global (G) 3,714 4.95% 5.87% 7.25%
Birla Sun Life MNC (G) 3,623 3.76% 4.82% 7.25%
Nippon India Pharma (G) 3,188 6.84% 7.79% -0.26%
SBI ESG Fund (G) 2,620 5.20% 6.08% 7.44%
ICICI Pru Banking (G) 2,613 4.57% 5.75% 7.11%
Data Source: AMFI

Four out of the top five sectoral funds by AUM have underperformed. The outperformer is Nippon Pharma Fund and even that is due to the sudden outperformance by pharma sector in last 3 months. The linkage to AUM is quit tenuous.

Quick thoughts on AUM versus performance

Size of AUM had little bearing on the performance of large cap funds although the impact was more pronounced in mid cap funds. Small Cap funds also benefit by AUM size but here the benchmarks can be quite heterogeneous. In the case of sector funds, the choice of the sector appears to matter more than anything else when it comes to performance as it is all about being in the right sectoral fund at the right time. Finally, when an AMC lags in multiple categories, it is time to think with your feet!

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