What are Assets under Management (AUM) in Mutual funds? – Definition, Calculation, Importance

What is AUM in mutual fund?

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 a mutual fund performance over different time periods, or it can be compared against different mutual fund houses to understand comparative performance. 

How are Assets Under Management Calculated?

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. 

Impact of high AUM on Mutual Funds

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:

1. 2.5% for the first Rs.100 crore of average weekly AUMs
2. 2.25% for the subsequent Rs.300 crores
3. 1.75% for all AUMs above Rs. 300 crores.

For debt mutual funds, the permitted expense ratio is 0.25% lower than equity funds.

Why is AUM Important while investing?

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.

Factors to know about AUM before investing in Mutual Funds

Some of the important points that investors must be aware about AUMs before investing in mutual funds are:

1. Importance of size of AUM – While looking at the AUM of a mutual fund, investors must remember that size is relative. Small or large AUM will depend on what it is being compared against. Instead of considering the absolute value of assets under the management of a mutual fund, investors can compare the AUM with the fund house’s peers to determine the fund’s performance.

2. Is AUM the only determinant of fund performance – A large AUM does not indicate guaranteed positive performance. While it should be considered before making an investment, a fund’s AUM must not be the only determining factor when it comes to an investment decision.
3. Alternative performance indicators – Investors must consider AUM in combination with other indicators such as the fund’s historical performance as compared to its peers, various market cycles, etc. The fund’s expense ratio, the reputation of the fund manager, strategies related to risk management, risk ratios, etc, must also be considered.

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.

How is AUM linked to market fluctuations?

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. 

Conclusion

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.

FAQs

1. What is the difference between AUM and NAV?
   NAV is the price at which shares in a mutual fund can be bought and sold. AUM is the total value of assets managed by a mutual fund. AUM is expressed as a total or net value, whereas NAV is expressed on a per-share basis.

2. How does AUM affect mutual fund returns?
   AUM of an equity mutual fund can be easily impacted by market fluctuations. If the AUM increases or decreases drastically, it can impact the Net Asset Value of the mutual fund. This, in turn, could impact the mutual fund returns.

3. Is fund size and AUM the same?
   AUM or Assets Under Management is the net market value of the assets managed by a mutual fund house. Fund size is a term that is sometimes used in place of AUM. Thus, both show the value of assets being managed by a fund house.

4. What is the importance of AUM?
   AUM defines the size of a company and also its success to a certain extent. Investors consider this as an important factor while making an investment choice. The AUM of a mutual fund is also inclusive of the returns generated, and hence it can be used as a factor while comparing against peers.

5. How to check the AUM of a mutual fund?
   Every mutual fund house declares its AUM on its official website. Investors must check for the AUM along with other key factors while choosing a mutual fund option