Definition and Investor Benefits of Analyzing Total Net Assets

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Definition: A mutual fund’s total net assets, not to be confused with Net Asset Value (NAV ), represents the total of all investor dollars invested in all share classes of the fund. The net amount includes shares to redeemed at the end of the day, which would have the effect of lowering the total assets under management, to arrive at net assets.

Benefits of Analyzing Total Net Assets

A mutual fund’s assets under management (AUM), or what Morningstar calls net assets, can be useful to an investor because larger AUM can make a mutual fund more difficult and cumbersome to manage, which can drag fund performance.

High relative size of net assets can also force a fund into a different style or category. For example, a small-cap stock fund with $1 billion in net assets may not perform as well as a small-cap stock fund with $500 million in net assets. This is because large investments in small companies can have the effect of adversely affecting the share price of the small company being bought or sold in the fund. For this reason, small-cap stock funds with high net assets tend to buy stocks of larger capitalization, which can cause the fund to evolve into a mid-cap stock fund. This is called style drift.

How Much Net Assets is Too Much?

Size is relative. Therefore an investor is wise to understand how much is too much by comparing to averages—apples to apples, so to speak. For example, net assets under management for an average large-cap stock fund can be in the range of $500 million. However, the largest large-cap stock funds can have more than $50 billion under management. Bigger is not better. It can be wise to look for average to below-average net assets for a mutual fund and it is generally true that the smaller the capitalization of a fund, the lower the net assets an investor will prudently seek. However, extremely low net assets, such as $10 million or less, can be a caution. Again, use the averages within the fund category to make apples-to-apples comparisons and look for average to below-average net assets.

It should also be noted that the size of an index fund’s total net assets will not typically affect its performance like that of an actively-managed mutual fund. In fact, many actively-managed large-cap stock mutual funds with high relative net assets often begin performing like an index fund because the manager is forced to buy stocks that are in the index.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.