The alpha question: Do mega AUMs guarantee higher returns in MFs?

In mutual fund investing, many assume that a bigger fund, measured by its assets under management (AUM), is more reliable or better-performing. But real-world data suggests that high returns don’t always come from high AUMs.

Some of the best-performing funds over the last five years are those with smaller AUMs, proving that agility and strategy often matter more than size.

Dhirendra Kumar, CEO of Value Research, says, "In mutual funds, performance is not linearly linked to size. Scale can help in some categories—index funds, large-cap equity, or fixed-income strategies, where trading efficiency and lower costs matter. But in capacity-constrained areas—small caps, micro caps, thematic or narrowly traded segments—getting too large can dilute agility and push a manager toward closet indexing. Investors should judge the strategy’s investable universe and whether the fund’s current asset base is still ‘right-sized’ for it, not chase the biggest pot."

Small funds, big alpha?

Take the case of Tata Small Cap Fund, which manages ₹11,163.8 crore, among the lowest AUMs in its category. Yet, it delivered an impressive 33.68% 5-year return, not far behind the Nippon India Small Cap Fund, which has an AUM of ₹66,601.8 crore and posted 37.32%. This indicates that even with a limited size, a well-managed small-cap fund can deliver strong results.

“Since fund categories are well defined, asset managers need to demonstrate the ability and edge that the team and the investment processes bring to the strategy and the fund house. This takes time and patience in terms of building the track record and demonstrating to investors the efficacy of the investment process and differentiated approach,” says Kaustubh Belapurkar, director-manager research, Morningstar Investment Research India.

Large doesn’t always mean lagging

The large-cap space offers a similar example. ICICI Pru Focused Equity Fund, with an AUM of ₹12,243.5 crore, delivered a 25.86% return, outperforming the ICICI Pru Large Cap Fund, which has a much higher AUM of ₹72,336.1 crore and a return of 23.04%. Smaller large-cap funds can often focus on a concentrated portfolio and act quickly, giving them a possible edge.

“There is no fixed threshold for the amount of assets that a particular investment style can effectively manage; it varies based on the management team, the processes used, and the current phase of the economic cycle," explains Belapurkar. "Fund capacity is an important consideration; it depends on the optimal AUM up to which the strategy can be run similarly without changing its core approach. Certain categories will be more prone to capacity issues. For example, small-cap funds can face challenges as the size grows; it becomes harder to find good quality small caps with reasonable liquidity. But a fund that invests in a diversified basket of large-cap stocks will typically have a much higher capacity.”

When size works just fine

In the flexi cap category, the fund size did not hurt performance. The Parag Parikh Flexi Cap Fund, with a massive ₹1.10 lakh crore AUM, delivered 24.58% returns, outperforming the DSP Flexi Cap Fund (₹12,187.8 crore AUM), which gave 21.54%. This shows that when backed by a strong investment strategy, even large funds can continue delivering competitive returns.

Similarly, the hybrid space reveals a different story. The HDFC Balanced Advantage Fund, with over ₹1.02 lakh crore AUM, posted a solid 24.57% return, while the Edelweiss Balanced Advantage Fund, with a much smaller AUM of ₹12,696 crore, returned only 14.99%.

“There are several pros and cons to small or large-sized asset managers, but there’s no one-size-fits-all approach,” says Belapurkar. “It depends on the type of strategy being used. Larger funds may have the benefit of hiring bigger teams to conduct more in-depth, proprietary, bottom-up research, which could be a source of alpha. At the same time, smaller funds might be more agile and able to pursue specialised strategies that may not be viable at a larger asset base.”

The takeaway

Fund size alone isn’t a predictor of performance. Strategy, asset allocation, the fund manager’s decisions, and team strength often play a bigger role. Whether it’s a niche small-cap or a dominant flexi-cap, returns depend more on how the fund is run, not how large it is. Sometimes, smaller funds deliver outsized results, proving that big returns don’t always need big AUMs.

Kumar says, "Start with your asset allocation and time horizon; fund selection is downstream of that. Within a category, prefer funds with a clearly stated, consistently executed strategy; competitive costs; and a record of behaving as promised through full market cycles—not just the latest 12-month chart.” Look at risk-adjusted outcomes, drawdown control, and portfolio integrity (does it hold what the label implies?). Manager tenure and team depth matter more than brand scale. Finally, use disciplined, periodic investing rather than lump-sum performance-chasing: investor behaviour drives outcomes as much as fund choice,” adds Kumar.