Assets Under Management (AUM): Impact on Mutual Funds
Before investing in any mutual fund, one of your primary questions is, “How much money does this mutual fund control?”
Technically, you are correct; the money under control or Assets under Management (AUM) should be your concern. But is AUM the deciding factor for the returns of your investment?
What impact does AUM have on your mutual fund? Let’s find out.
What is AUM?
Assets under Management are the total value of the assets the AMC or the mutual fund scheme holds on behalf of the fund holders. Simply put, it is the size of an AMC’s portfolio or the mutual fund scheme’s portfolio.
It works similarly to a company’s market capitalisation, as both represent the value of resources of the investors.
The fund managers are experienced professionals who manage the AUM to build a portfolio. They execute the investment decisions to mitigate risk and aim to appreciate the investor’s capital.
AUM is a crucial metric that serves as a fund house’s size parameter.
Fun(d) Fact💡: The AUM of the Indian MF Industry has grown 6-fold from ₹10.11 trillion in May 2014 to ₹58.91 trillion as of May 2024 in just 10 years.
How to calculate assets under management
Assets under management (AUM) comprises the net cash inflow and value of underlying assets (shares/ assets/ mutual funds/ bonds, etc.) owned by the mutual fund.
The total value of a mutual fund’s AUM can fluctuate in two ways. First, the AUM can increase or decrease based on investor activity, such as new contributions or redemptions.
Second, the market performance of the fund’s underlying investments can also impact the AUM, as rising or falling asset values will directly affect the overall total.
Many mutual funds show different formulas for calculating their AUM.
However, a simple method of calculating a fund’s AUM is multiplying the NAV (Net Asset Value) per unit by the number of outstanding units in the fund.
AUM = (Number of Outstanding Units) x (NAV per unit)
Impact of AUM on Mutual Funds
The Assets Under Management (AUM) of a mutual fund is an essential factor that investors should consider before investing. Here are some key points to keep in mind:
- A fund’s size and scale: A mutual fund’s AUM reflects its size and scale. Generally, a larger AUM signifies that a fund is well-established and makes larger investments. This may attract investors looking for a fund with a solid track record.
- Impact on investment decisions: The size of a fund’s AUM can directly impact its investment decisions. For instance, if a small-cap fund becomes too large, investing in smaller companies may be challenging, limiting its investment universe and growth opportunities.
- Influence on fund performance: The performance of a mutual fund can be impacted by its AUM. A large fund may find it harder to achieve high returns as it may be more challenging to find unique investment opportunities without disrupting the market. On the other hand, a smaller fund may have more flexibility to take advantage of unique opportunities and generate higher returns.
- Effect on fund fees: The AUM of a mutual fund can impact the fees investors pay to invest in the fund. SEBI has mandated a tiered expense ratio structure, wherein large funds have smaller fees, and smaller funds can have higher fees. However, larger funds may also have higher minimum investment requirements, limiting access to some investors.
Thus, it should be noted that the size of the AUM does not directly impact the returns of a mutual fund. Instead, the fund’s performance relies on the fund managers’ expertise in navigating market conditions and implementing a good investment strategy.
AUM & Expense Ratio
Mutual fund houses charge a management fee based on the AUM of the fund, which is a flat rate applied to the total assets under management. This fee is included in the mutual fund’s Total Expense Ratio (TER).
Despite the availability of numerous mutual funds with large AUM, the TER for equity schemes has not decreased. This is primarily because the investors in these schemes are mostly retail investors who lack significant bargaining power.
Conversely, in the case of debt funds, the investors are predominantly corporates and institutional entities. These investors have greater bargaining power, allowing them to benefit from economies of scale, which results in lower TER for debt funds.
However, SEBI has set guidelines that mandate the TER to be lower for mutual fund schemes having higher AUM. This ensures that investors are not charged excessively and the mutual fund operates cost-effectively.
Should you check the AUM before investing?
While having a high AUM can provide investors with a sense of comfort, it’s important to remember that it doesn’t guarantee returns or outperformance. It’s true that generally, a fund house with a higher AUM is considered more successful, as it indicates that more investors trust the AMC with their money. Also, high AUM provides a good cushion to somewhat absorb the market’s volatility.
However, this is a retrospective measure and doesn’t necessarily indicate future performance.
In fact, a mutual fund scheme with a lower AUM may sometimes offer better returns than a similar scheme with a higher AUM. This is because a smaller scheme may have more flexibility and be able to take advantage of opportunities that larger funds may not be able to pursue as quickly.
So, it’s important to consider multiple factors when selecting a mutual fund, including AUM, but not relying on it as the sole determinant of a fund’s success or potential returns.
Conclusion
Assets under management (AUM) is a key metric used in the financial industry to measure the size and performance of mutual funds. AUM can impact factors such as expense ratios, net asset value, and economies of scale. To make informed investment decisions, investors should consider various factors when selecting a mutual fund, including AUM.
Frequently Asked Questions (FAQs):
Is the high AUM of a mutual fund good or bad?
A high AUM can be a good sign for a mutual fund, as it may indicate that it is well-established and has a solid track record. However, a high AUM can also make it more difficult for the fund to generate higher returns, as it may be more difficult to find attractive investment opportunities when managing a larger asset size.
What is the difference between market cap and AUM?
Market capitalisation (market cap) refers to the total value of a company’s outstanding shares of stock. On the other hand, AUM refers to the total value of all the assets a mutual fund manages on behalf of its clients.
What is Assets under administration (AUA)? How is it different from AUM?
Assets under administration (AUA) refers to the total value of assets that a financial institution administers on behalf of its clients, such as a bank or brokerage firm. AUA differs from AUM as it does not include assets the institution actively manages.
Does AUM affect all mutual funds?
AUM can impact the performance of mutual funds, but its effect can vary depending on the specific fund and market conditions. Generally, larger mutual funds with a higher AUM may be more stable and have lower expense ratios but may also face challenges in finding attractive investment opportunities. Smaller funds with a lower AUM may have greater flexibility in their investment strategy but may also be less established and more volatile.
How is AUM different from NAV?
NAV represents the value of each unit of a mutual fund scheme, while AUM shows the total value of assets being managed by the mutual fund scheme; focusing on AUM while investing is important, as it gives a broader picture of the fund’s operations and scale. NAV is important in determining the current value of a share.
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Image published on March 21, 202
