What is AUM in Mutual Funds?
Mutual funds not only allow you to gain inflation-beating returns but also offer high liquidity. However, before investing through a mutual fund, you need to understand certain concepts, and AUM or Asset Under Management is one of them.
In this article, you will learn what AUM is in mutual funds, its importance, and how it is calculated. Let’s get started.
What is AUM?
AUM or Assets Under Management refers to the cumulative market value of the assets held under a mutual fund scheme at a given point in time. It includes the returns generated by a mutual fund scheme and the capital a fund manager has at their disposal to make new investments.
The AUM of a mutual fund is an indicator of its size and performance in recent years. An increasing AUM indicates that the fund is performing positively, and new customers are progressively investing in it. On the other hand, the decreasing AUM shows the opposite, i.e., the fund is performing poorly, and the investors are looking to exit their investments in it.
How is the AUM calculated?
Simply put, if 1000 investors have cumulatively invested Rs. 1 crore in a mutual fund that has earned 12% returns, the fund’s AUM would be Rs. 1.12 crore. However, there is no fixed method for the calculation of the AUM of a mutual fund. Different Asset Management Companies (AMCs) use other methods for it.
The value of a fund’s AUM can increase or decrease daily based on several factors, such as the fund’s performance, market volatility, and the flow of investment into it.
Market fluctuations also have a direct impact on the AUM. The value of the underlying assets goes up when there is a bullish trend in the market, resulting in an increased AUM. Similarly, when the market shows a bearish trend, the value of the underlying assets starts declining and as a result, the AUM also witnesses a fall.
Similarly, positive performance swells up the overall investment value in a mutual fund and also attracts new customers, thereby pushing up the AUM. Whereas, the negative performance of the fund has an opposite impact on its AUM.
The importance of AUM
A higher AUM signifies that the fund is performing well and an increasing number of investors are pooling their money in it. The AUM of a mutual fund also tells the investor about its size and liquidity. Sometimes, fund managers also take a look at the AUM while making investment-related decisions.
Let’s discuss the importance and impact of the AUM on different types of mutual funds:
In the case of equity funds, the fund manager’s skills matter more than the AUM. Equity funds are more dependent on market fluctuations and can provide good returns if the market is on the bullish side.
If you are planning to invest in debt funds, AUM is an important factor that you should consider. A debt fund with a higher AUM spreads the fund expenses across a large group of investors, which reduces its expense ratio per person and hence, increases the returns.
Similar to equity funds, returns generated by large-cap funds do not necessarily depend upon the AUM. It has happened in the past that certain large-cap funds have been able to deliver superior returns despite the fewer number of investors showing their faith in them.
As compared to large-cap funds, small-cap funds are more dependent on the AUM. It mainly happens when the total investment in a fund increases beyond a certain point, i.e., when a fund house becomes a major shareholder in a company.
Impact of AUM on fund’s expense ratio
All fund houses charge a nominal fee from the investors to ensure smooth management and administration of their funds. That fee is known as the expense ratio of a fund. This expense ratio is directly proportional to the fund’s AUM as a higher value of assets requires more effort and time for optimal management.
However, the expense ratio of a mutual fund cannot move beyond a fixed percentage, set by the Securities and Exchange Board of India (SEBI).
In a nutshell
The AUM of a mutual fund is the value of the total investments held under it. It is an excellent parameter to assess the popularity and current performance of a fund. However, it should not be the sole factor behind your decision to invest in it. You should also consider a few other factors, such as the fund manager’s history, expense ratio, and your investment objectives.