Should I avoid investing in schemes with small AUMs?

Do mutual funds with low AUMs have liquidity issues when redemption happens. Does investing in schemes with large AUMs better?
—M Niles

You have not mentioned whether you are talking about debt schemes or equity schemes. A small AUM can be a liability in the case of debt mutual funds. One wrong call can have a huge impact on the performance of the scheme. A large redemption can also have an adverse impact as the fund manager would be forced to sell the most liquid or the best picks. However, this doesn’t mean that a large AUM is always better.. A very large AUM can be a handicap to small and mid cap schemes. It will be challenging to find enough interesting investment opportunities in these spaces. This is the reason why some mid and small cap schemes close their schemes. A very large AUM can also adversely impact the performance of schemes. Though there is no conclusive proof any advisors have been asking investors to stay away from schemes with very large AUMs.

Finally, a lot depends on the fund house and fund managers. Many small funds performed admirably and became large funds. Remember, many funds started small and became very large after investors started noticing the performance. Finally, it is better to invest in schemes and fund houses with high midsized AUM and high professional standards.