Assets Under Management, in simple terms, is the total market value of all the assets that are managed by a mutual fund at a given point. This includes the returns on investment generated by a mutual fund and also the capital available to make fresh investments.
Thus, AUM is a two-fold indicator, since it talks about performance and the size of a mutual fund. A higher or increasing AUM indicates positive mutual fund performance, or it could mean that new customers have bought additional funds or both. A decreasing AUM, on the other hand, is an indication of poor performance or a high level of unit redemption by customers. The latter may or may not be associated with the fund’s performance.
Investors can either use AUM to compare mutual fund performance over different time periods, or it can be compared against different mutual fund houses to understand comparative performance.
The total value of assets under management of a mutual fund house never remains fixed. It fluctuates depending on the amount of money being invested by existing investors and the number of new investors who invest money. It also depends on the returns that a mutual fund generates.
There are different methods used by fund houses to calculate the assets under management. In case of positive returns, the total investments in the fund rise and this leads to an increase in the number of investors and therefore, an increase in assets under management.
When a fund gives negative returns, it results in a decrease in assets under management of the company. Similarly, if investors redeem their share, the fund’s value will decrease and result in a lower AUM.
All mutual fund houses charge a fee, normally called as the expense ratio. The expense ratio includes management fees and operational costs. These depend on the fund size. AUM is an important factor that influences the calculation of management fees of a mutual fund.
Since expense ratio or the fees of a mutual fund are calculated as a percentage of AUM, a higher AUM means higher fees and a smaller AUM means lower fees.
Based on AUMs, the Securities and Exchange Board of India has set an upper limit of expense ratios that mutual funds can charge. For equity mutual funds, SEBI has set a maximum expense ratio as below:
For debt mutual funds, the permitted expense ratio is 0.25% lower than equity funds.
A mutual fund that has a high AUM indicates a higher client base and reflects the high level of trust that a fund house enjoys from its clients. Many investors use AUM to understand the level of liquidity. A higher AUM acts as a cushion whenever there is a huge redemption. This mostly applies for overnight and liquid funds that often witness large redemptions made by institutional investors. With a higher AUM, such funds can easily absorb large-scale or shock offloading.
Some of the important points that investors must be aware about AUMs before investing in mutual funds are:
A mutual fund house’s AUM does not necessarily have a direct impact on its performance. A combination of factors determines a fund house’s performance. Hence, investors must consider all the above along with AUM figures.
Market fluctuations can impact the AUM of mutual funds. This is mainly because of the movement in prices that impact the value of the assets held by a fund house.
For example, let’s assume that 100 investors invest Rs. 1,00,000 in a fund that further invests in equity stocks and fetches a return of 10%. The AUM of the fund will be Rs. 1,10,000. However, if the fund incurs a loss of 10%, then the AUM will be Rs. 90,000.
However, a well-diversified fund will have higher chances of withstanding market fluctuations no matter the size of its AUM.
While assessing investment options, investors must look at how well a mutual fund can manage its assets. Assets under management can reflect how popular a mutual fund is, however, it should not be the only determinant in an investment decision. Other factors such as the fund manager’s experience, strategies adopted by the mutual fund, etc are equally important to be considered.
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