What is AUM in mutual funds? What does it stand for or how is it calculate? Let’s answer what does it mean when investors talk about AUM in mutual funds!
The aggregate market value of the investments held by a mutual fund is known as its Assets Under Management (AUM). On behalf of the investors, the fund manager handles these assets and makes all investment-related decisions.
AUM is a measure of a fund house’s size and performance. The assets managed by a fund can be easily compared with other similar funds’ performance over time.
The returns a mutual fund receives are also factored into the AUM value. This can be used to purchase securities, hold them as specified by the investing mandate, or distribute dividends to investors.
Things to consider in AUM before investing?
Investors in mutual funds frequently evaluate the fund’s AUM and are impressed if it is on the higher side. People assume that a fund must be good if so many investors have previously contributed to it.
However, there are a lot of reasons why this number shouldn’t matter when selecting a fund.
Some of the most crucial elements to consider are the expense ratio, the fund manager’s reputation, and compliance with the investing mandate. Let’s examine the significance of AUM in relation to various fund types.
1. Large-cap funds
Let’s examine an example of how AUM affects large-cap mutual funds. Two large-cap equities funds are HDFC Top 200 and Mirae Asset India Opportunities.
The former’s AUM is Rs.14,655 crore compared to the latter’s just Rs.4,738 crore. Most investors may choose to invest in HDFC Top 200 for this reason. However, the Mirae has historically earned higher returns over various periods.
2. Small-cap funds
Small-cap funds typically limit the inflow of cash after a specific threshold. A well-known case of this is the DSP BlackRock Micro Cap Fund.
This typically happens when a mutual fund’s assets exceed a certain threshold.
When the market fluctuates, the fund might not be able to quickly trade its shares if it becomes a major stakeholder in a company.
Due to this, small-cap funds frequently stay away from lump-sum investments and instead opt for SIPs.
3. Debt funds
If you’re considering investing in debt funds, AUM is an important factor to consider. The fixed fund costs might be split among more investors in a debt fund with higher capital.
This can lower the cost per individual and hence boost fund returns.
Additionally, more assets under management assist the fund organization in securing fair interest rates from debt issuers.
4. Equity funds
Here, stability in returns and commitment to the investing mandate by the fund company is more important than AUM. By stability, we mean surpassing the benchmark during both the highs and lows of the market.
As a result, rather than popularity or size, an equity fund depends on the asset manager’s ability to produce strong returns consistently.
How to calculate AUM in mutual funds?
Fund houses use different techniques to determine assets under management. When a fund continuously generates positive returns, its total investment value will increase.
Growth in AUM might result from the attraction of new assets and investors due to strong performance.
Similarly, assets may drop if the market value or investment performance declines. The same applies to sudden fund closures and share redemptions by investors.
Capital that has been invested in the firm’s goods is included in its assets under management, which also includes the stock of the company’s executives.
Formula to calculate AUM: “AUM = Net Asset Value (NAV) * Total number of units.”
AUM’s impact on the expense ratio or fee
Every fund house charges a fee called a management fee that is based on the size of the fund. Investors are charged based on the number of units they own at a single cost for the entire fund.
The fees are unaffected by the performance of the fund.
It just pays for administrative costs and establishes the asset manager’s pay for his work. The annual costs to run a mutual fund are measured by the total expense ratio (TER).
According to SEBI, the AUM must always be more than the TER.
High AUM’s effects on mutual funds
AUM growth can occasionally hurt an equity fund’s performance. However, there is hardly any data to suggest that a bigger AUM either helps or hurts the fund’s performance.
The fund manager is the one who should seize market opportunities and buy or sell a stock at the appropriate moment.
Larger assets under management have frequently made it more difficult for the manager to make rapid judgments regarding investments. Before investing, evaluate the fund’s performance in relation to the benchmark and its rivals.
Higher AUM means the manager needs to be on point and well-experienced. Check the experience of the manager in handling high assets before investing in such funds.
AUM and market fluctuations
Market movements have a significant impact on the assets managed. The assets of the fund will increase when it generates returns and decrease when it suffers losses.
This impacts the mutual fund fee as well. Lower expenses typically equate to lower value.
For instance, imagine that a mutual fund that has produced 10% returns has received a total investment of Rs. 10,000 from 100 investors. If so, Rs. 11,000 would be the fund’s AUM.
After all, businesses determine the worth of their assets under management using a variety of techniques.
AUM is a great way to evaluate a fund’s popularity and performance. However, it should not influence your decision to invest in that fund.
Should you consider AUM before investing?
AUM is an essential factor that helps you in shortlisting the funds. The higher the AUM, the more stable the fund could be. Often you will see Analysts mentioning AUM > Rs 1000 crore is a good benchmark as it defines the fund’s stability.
Also, the expense incurred to manage the fund gets spread, and the expense ratio reduces with rising AUM. Let us see the impact of AUM on equity funds and debt funds –
1. Equity funds
In equity funds, consistency and sustenance of returns are more critical than AUM. Thus, the investment process and philosophy should be given more importance.
2. Debt funds
In debt funds where the investment is in different fixed-income instruments, it is critical to consider AUM. While benefits such as expense ratio and reputation are one thing, the essential thing in debt funds is getting reasonable rates with debt issuers.
With higher AUM, the fund manager tends to get better rates which add to the performance. Also, higher AUM in debt funds for retail investors adds to the fund’s stability.
Impact of high AUM in mutual funds
While a high AUM is good for the stability of the fund but huge AUM often impacts your performance.
For example – in the case of Large Cap Equity funds, if a fund reaches are very high AUM, the performance is likely to get impacted as the universe of stocks in which the money can be deployed is minimal and beyond a point outperforming the benchmark in large-cap space (where information inefficiency is negligible) is often tricky.
Thus, while AUM is necessary for the stability of a fund, it is not the only and single most critical factor on which the decision to buy or sell a fund should be dependent.
FAQs
What is a good AUM in mutual fund?
AUM is a measure of a fund house’s size and performance. AUM size only matters in certain funds.
What is AUM vs NAV?
NAV refers to the prices of shares in a fund while AUM refers to the value of assets managed by the advisor.
How is AUM calculated?
Here is the formula to calculate AUM: “AUM = Net Asset Value (NAV) * Total number of units.”
