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All You Need to Know About AUM (Assets Under Management)

Before you invest in a mutual fund, it is essential to understand certain concepts to make an informed decision. Assets Under Management, or AUM, is one of those.  AUM is a crucial indicator to consider while evaluating a mutual fund.  

Understanding Assets Under Management

Assets Under Management refers to the total market value of the assets that a mutual fund manages at a given point in time. AUM includes the returns a mutual fund has made on its investment as well as the capital a manager has at disposal to make new investments.

AUM is an indicator of mutual fund performance as well as its size. An increasing AUM may indicate positive fund performance or new customers who have brought in additional funds to be invested or both. A decreasing AUM means the opposite: poor performance or a large redemption, which may or may not be linked to the fund’s performance.  

A fund’s AUM can be compared over a while to establish its credibility and success. As an investor, you can also compare the AUMs of different mutual fund investment houses to understand their performance. 

How important is AUM for investing?

A mutual fund with a hefty AUM indicates a large client base, meaning that the trust factor of the fund is high. AUM can be used as a measure of liquidity. A higher AUM can provide a cushion in case there is a big redemption. This is especially true for overnight and liquid funds that are sensitive to large redemptions by institutional investors. Having a higher AUM for such funds means a better ability to absorb shock offloading.

One factor to keep in mind is that size is relative. Small or large depends on what you are comparing it against. Rather than looking at the absolute value of assets that a mutual fund is managing, compare the figure with its other peers to ascertain how the fund is doing.

Additionally, a large AUM does not automatically guarantee better performance. Although it is worth taking into account, a fund’s AUM should not be the only factor that affects your investment decision. Just because other people in the market have trusted a fund house with their money does not mean that you should too. Consider AUM in conjunction with other indicators like a fund’s historical performance vis-à-vis peers in different market cycles, expense ratio, risk ratios, fund house’s pedigree, the reputation of the fund manager, risk-management strategies, compliance, among others.  

How does a high AUM impact a mutual fund performance?

A fund house’s AUM usually has no direct bearing on its performance. A large AUM cannot impact returns. The performance of a mutual fund depends on the fund manager and their investment abilities.

How is AUM calculated?

The value of assets that a fund manages is never fixed. It changes depending on the number of investors who pump in money and the returns the fund generates.

Positive returns increase the overall investment and can also attract new investments, which in turn pushes up the AUM. Negative returns will have the opposite impact. Redemption of units will also impact the AUM.  

How does AUM impact the fund fee?

AUM is most crucial when it comes to calculating the management fee. All fund houses charge a fee, called the expense ratio, in proportion to the fund size. The expense ratio covers management and operational costs. The Securities and Exchange Board of India has clearly demarcated the upper limit of expense ratios for mutual funds, based on AUMs.

Since it is calculated as a percentage of AUM, a larger AUM means higher fees for the fund house while a smaller AUM means the opposite.

For equity mutual funds, SEBI permits a maximum total expense ratio of 2.5% for the first Rs.100 crore of average weekly AUMs, 2.25% for the subsequent Rs.300 crores, and 1.75% for all AUMs beyond that. For debt mutual funds, the TER permitted is 0.25% lower than for equity funds.

AUM and market fluctuations

Market fluctuations have a direct bearing on the AUM of mutual funds. This is because the movement in prices will impact the value of the assets that the fund holds. For instance, say 100 investors put in ₹1,00,000 in a fund that invests in market stocks and earns a return of 10%. Then the AUM would be ₹1,10,000. Alternatively, if the fund had made a loss of 10%, then the AUM would have been ₹90,000.

However, a fund that is well-diversified will be able to withstand market fluctuations irrespective of the size of its assets.

Bottomline

Consider how a mutual fund manages its assets to assess the popularity of the mutual fund in India. However, it should not be the sole deciding factor when you invest. Learn about other factors and understand the fund manager’s history as well as the strategy before you make an investment decision.

Next To Come: A Definitive Guide to Systematic Methods: SIP, SWP & STP

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