Some mutual funds grow so large they start to resemble overcrowded restaurants — once highly coveted for their quality, now overwhelmed by demand. And that tends to strain performance. This phenomenon, known as mutual fund bloating, happens when a fund attracts more assets than it can efficiently manage. While it sounds contradictory, success can eventually hinder the fund’s flexibility, impact returns, and make it harder to implement its original strategy. Let’s break down what mutual fund bloating actually means, why it happens, and how it can affect your portfolio, especially if you’re relying on actively managed strategies. What Is Mutual Fund Bloating? Mutual fund bloating occurs when a fund’s ballooning size starts to work against it. In practical terms, the fund’s assets under management (AUM) exceed the level at which the manager can efficiently deploy capital without sacrificing returns or deviating from the fund’s original investment strategy. Bloating is typically most relevant for active managers, particularly those focused on small-cap stocks and less liquid markets. With more capital to deploy, managers may feel pressure to spread assets across additional holdings or shift into larger, more