Assets Under Management is the full form of AUM. It is a crucial metric in the financial sector, representing the aggregate market value of all investments that a financial entity oversees for its clients. It is similar to the concept of market capitalisation in the stock market.
In the context of mutual funds, AUM denotes the complete market value of all the assets managed by the fund or a group of funds. This concept also applies to other financial institutions, such as venture capital firms, brokerage firms, and registered investment advisors or portfolio managers, where it indicates the total value of managed investments.
In this article, we will understand the meaning and calculation of AUM in mutual funds with the help of an example. We’ll also answer questions like:
- Why is Assets Under Management a crucial metric to consider before investing?
- What is the relationship between AUM and Expense Ratio?
- Impact of AUM in different mutual funds.
What is AUM in Mutual Funds?
Asset Under Management refers to the aggregate investment held by a mutual fund. It’s the total market value of all the assets and capital that a fund manages.
Managed by fund houses, AUM is under the careful supervision of fund managers. These professionals oversee asset performance and strategise investments, aiming to maximise capital growth for investors. AUM serves as a key measure of a fund house’s performance and its overall size.
A higher AUM is often indicative of a fund house’s robust investment inflow, quality of management, and depth of experience. The fees charged by these fund houses are usually a percentage of their AUM.
Note: AUM is dynamic, changing daily to reflect the ebb and flow of returns/resources from the entities in which the fund houses have invested. Generally, funds with larger assets tend to be more liquid, offering more flexibility in withdrawing/handling investments.
Calculation of AUM in Mutual Funds
Calculating the Assets Under Management in mutual funds is a direct process. It involves multiplying the total units or shares held by investors with the prevailing market price per unit or share. This calculation yields the total market value of all the shares or units in the fund.
The formula for AUM is:
AUM = (Total Units or Shares Held) × (Market Price Per Unit or Share)
For instance, consider a mutual fund that issues 1,00,000 shares. If the current market price of each share is ₹50, the AUM of the mutual fund can be computed as follows:
AUM = 1,00,000 shares × ₹50 per share = ₹5,000,000
This simple yet effective formula provides a clear picture of the total value of the assets managed by the mutual fund, reflecting its scale and investor participation. To calculate the precise AUM, one must consider various components like bank deposits, investments in mutual funds, and any cash reserves.
Importance of AUM in Mutual Funds
Assets Under Management in mutual funds is a vital metric that carries significant importance for both investors and fund managers. Here are the key reasons why AUM is crucial in the context of mutual funds:
- Indicator of Fund Size and Success: AUM is often viewed as a measure of the size and success of a mutual fund. A larger AUM indicates higher investor trust and confidence in the fund, suggesting that more investors are willing to invest their money in it.
- Impacts Fund Performance: The size of the AUM can influence a fund’s performance. Funds with a larger AUM have more capital at their disposal, which can lead to more investment opportunities and potentially better diversification. However, large AUMs can sometimes make it challenging to manage the fund effectively, especially in niche markets or sectors.
- Economies of Scale: A higher AUM allows for economies of scale. With more assets under management, the fund can negotiate lower transaction fees and spread its operational costs over a larger asset base, potentially reducing the expense ratio for investors.
- Liquidity: Funds with a larger AUM tend to offer better liquidity, making it easier for investors to enter and exit the fund. This is particularly important for investors needing to redeem their investments quickly.
- Fee Structure: The AUM of a fund often influences the fee structure. Funds with larger AUMs can charge lower fees as the operational costs are spread over a larger base. This can make such funds more attractive to cost-conscious investors.
- Market Impact: In certain cases, a fund with a significant AUM can notably impact the market, especially if it holds large positions in particular stocks or sectors. This can affect the fund’s ability to enter or exit positions without influencing market prices.
Impact of High AUM in Mutual Funds
The performance of mutual funds in financial markets is heavily influenced by their AUM. This aspect largely depends on the fund houses, with those managing larger assets often being more attractive to customers.
The Assets Under Management in the Indian mutual fund industry has experienced dramatic growth, escalating from ₹8.90 trillion in November 2013 to ₹49.05 trillion by November 2023. This more than fivefold increase within a decade signifies a substantial expansion and robust growth in the sector.
Having a considerable AUM enables asset managers to swiftly adapt to market shifts, such as seizing or exiting investment opportunities as they arise. Investors frequently assess a mutual fund’s AUM to gauge its performance and potential returns.
However, investors should look beyond AUM when assessing a fund’s performance, as AUM size doesn’t always equate to better returns. Key factors to consider include the fund’s return history compared to benchmarks, risk levels, track record, and the fund manager’s experience, rather than focusing solely on AUM.
Impact of AUM in Different Mutual Funds
Let’s delve into the role of asset retention in mutual funds concerning different investment avenues:
Funds based on asset class:
- Equity Funds: Equity funds aim to yield strong returns and outdo the benchmark index, regardless of market conditions. The focus here is less on AUM and more on the asset manager’s ability to enhance returns.
- Debt Funds: For debt funds, the total asset is a key factor. A larger AUM allows the fund to distribute its fixed expenses among a wider investor base, reducing individual costs and potentially improving returns.
Funds based on market capitalisation:
- Small-cap Funds: Small-cap funds’ reliance on AUM is minimal, except when assets grow to a point where the fund becomes a significant stakeholder in a company. These funds often prioritise Systematic Investment Plans (SIPs) over large lump-sum investments instead of focusing on AUM.
- Large-cap Funds: The returns from large-cap funds are generally tied to market yields and are not heavily influenced by AUM. There are instances where smaller asset-class companies have outperformed larger asset companies in revenue generation despite having fewer shares held by investors.
It’s important to note that a high AUM doesn’t necessarily translate to superior returns in mutual funds. The fund’s success hinges on the portfolio manager’s skill and ability to leverage market trends and make strategic investment decisions.
Mutual funds with a lower AUM often have a lower Net Asset Value (NAV), presenting an opportunity for investors to potentially realise significant capital gains through strategic investments in such schemes.
Relation Between AUM and Expense Ratio
When managing your investment, a fund house imposes a charge that is a proportion of your investment. This charge, intended to cover the operational costs of the fund, is subtracted from the investment returns and forms part of the fund’s Total Expense Ratio (TER). This ratio varies depending on the fund’s AUM size, with larger AUMs requiring more resources for effective management.
In line with SEBI’s regulations, funds that have a larger scale of Assets Under Management are required to maintain lower TERs. Conversely, funds with smaller AUMs are permitted to levy higher expense charges. Refer to the following table for detailed information.
| AUM | TER for Equity Mutual Funds | TER for Debt Mutual Funds |
| First ₹500 crores | 2.25% | 2.00% |
| Next ₹250 crores | 2.00% | 1.75% |
| Next ₹1,250 crores | 1.75% | 1.50% |
| Next ₹3,000 crores | 1.60% | 1.35% |
| Next ₹5,000 crores | 1.50% | 1.25% |
| Next ₹40,000 crores | TER reduced by 0.05% for every ₹5,000 crores rise in AUM | TER reduced by 0.05% for every ₹5,000 crores rise in AUM |
| Above ₹50,000 crores | 1.05% | 0.80% |
Difference Between AUM and NAV
| Metric | AUM (Assets Under Management) | NAV (Net Asset Value) |
| Definition | Represents the total market value of all the assets in a fund, encompassing stocks, bonds, cash, and other types of investments. | The value per share or unit of a fund, is derived by dividing the fund’s total assets minus liabilities by the total number of shares or units. |
| Calculation | Calculated by totaling the market values of all assets within the fund’s portfolio. | Calculated as (Total Assets – Total Liabilities) / Total Number of Outstanding Shares or Units. |
| Indicates | Indicates the overall magnitude of the fund. | Reflects the value per share or unit of the fund. |
| Variability | Can change frequently, reflecting the performance of the assets within the fund. | Usually recalculated at the end of each trading day, subject to daily variations based on asset performance. |
| Main Use | Utilised to gauge the fund’s size and its appeal to investors. | Employed to ascertain the per-unit or per-share price for transactions involving fund shares or units. |
| Flow Impact | Influenced by investor inflows and outflows – contributions and redemptions. | Not directly affected by investor flows, though significant inflows or outflows can indirectly influence the NAV. |
| Example | A mutual fund with assets worth ₹7 lakh crore has an AUM of ₹7 lakh crore. | If a mutual fund with 10 lakh outstanding shares has total assets minus liabilities amounting to ₹7 crore, its NAV is ₹70 per share. |
To Sum Up
AUM is a key indicator of a mutual fund’s success and popularity. Funds with higher AUMs are often seen as more trustworthy due to greater investor participation. However, a larger AUM doesn’t always mean better returns.
When choosing a mutual fund, it’s good to consider its AUM and how it stacks up against similar funds. But remember, AUM shouldn’t be the only factor in your decision. Look at other important aspects of a balanced investment choice.
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FAQs
What is the ideal size of the AUM?
There’s no one-size-fits-all “ideal” AUM. It varies based on investment strategy and investor preferences, with some favouring larger AUM for stability and others smaller AUM for flexibility and growth potential.
What is included in assets under management?
AUM includes all types of investments managed on behalf of clients – stocks, bonds, real estate, mutual funds, cash, and accrued earnings like interest and dividends.
How does AUM affect fund performance?
Higher AUM can indicate investor trust and allow for more diversified portfolios, potentially enhancing fund performance due to economies of scale and greater investment opportunities.
What happens if AUM is high?
If AUM is high, it can lead to increased market influence and negotiation power for better terms. However, it might also result in reduced flexibility and potential difficulties in maintaining high returns as the fund grows larger.
What is the difference between AUM and market cap?
AUM is the total value of managed assets by a financial institution, while the market cap is the total value of a company’s shares in the stock market (stock price multiplied by the number of shares).
