The concept of Asset Under Management (AUM full form) of Mutual Funds is similar to market capitalization while directly trading in the stock markets – both reflect the potential returns generated against the resources of the investors.
What is Asset Under Management (AUM)
Asset Under Management is the total cumulative investment sum of a particular Mutual Fund. It represents the overall market value that the fund holds, combining the value of an asset and capital.
AUM is directly handled by fund houses; fund managers supervise the performance of these assets and make investment decisions to help investors enjoy substantial capital appreciation. AUM can be considered as a performance gradient and size parameter of a fund house.
The exact value of Asset Under Management includes bank deposits, Mutual Funds, and cash reserves for a particular. So, higher AUMs indicate better investment inflow, quality, and management experience on behalf of a fund house. Their fees are also often calculated as a percentage of the total Asset Under Management.
AUM usually fluctuates on a daily manner, showing the inflow and outflow of resources from the organisations that fund houses invest in. Usually, the funds that carry more assets are more liquid in nature.
Now that you know the AUM meaning, understand its impact on mutual funds.
Importance of AUM in Mutual Funds
Assets under management are important because-
Showcases the Size of a Fund
The AUM provides a clear glimpse of the size and scale of a mutual fund. Higher AUM signifies that the mutual fund has a firm position and is likely to get more investors.
Impacts Mutual Fund’s Overall Performance
The AUM can have a direct impact on the fund’s performance. If a fund is a large AUM, it might be challenging for it to generate high returns. This can happen because finding the right investment opportunities that help in earning more gains without hampering the market can be tough.
On the contrary, a smaller fund may be having higher flexibility to benefit from other investment opportunities and yield more returns.
Affects Mutual Fund Fees
A mutual fund’s AUM can have a large impact on the fees that an investor usually pays to invest in the mutual fund. For example, some larger funds might have a very high minimum investment. This may limit their access to a large chunk of investors.
Impact of High AUM on Mutual Funds
Mutual Funds Assets Under Management hold significant weightage to affect their performance in the financial market. It primarily depends on the fund houses; these organisations prefer asset-rich companies as they are more favoured amongst customers.
Studies comprising 361 different equity funds in 2012 showed that almost 170 funds had an AUM of less than Rs. 100 Crore, from which only 68% had an AUM of less than Rs. 50 Crore. However, it was observed that the total investment reached Rs. 530 Crore in 2008 to Rs. 3841 Crore in 2012. It showed the potential of the tremendous growth of Assets Under Management for different organisations.
A substantial asset fund can allow an asset manager to react against changing market opportunities, like exiting or entering into a particular investment when an opportunity arrives. Investors also often look at AUM in mutual funds to tally its performance and returns.
Let’s take a look at the importance of asset retention for Mutual Funds with respect to various investment options.
Equity Funds
Ideally, equity funds should offer a good return and outperform the benchmark index through market highs and lows. Equity funds depend less on AUM and more on the asset manager’s skill to boost its returns.
Debt Funds
Total asset is one of the most crucial factors of debt funds. Debt funds with more capital can spread their expenses across a larger group of investors, which will decrease the fixed fund expenses for every individual and increase the returns.
Small-cap Funds
Small-cap funds usually do not depend on Asset Under Management by a significant margin. These are only affected when the assets grow beyond a significant point – namely when fund houses become major shareholders of a particular company.
Small-cap funds often avoid calculating AUM and invest in SIPs instead of larger investments.
Large-cap Funds
The returns earned from large-cap funds primarily depend on the yields provided by the market. It usually does not depend on the Asset Under Management. There are several cases where companies of a smaller asset class have gathered significantly more revenues, despite the shareholders acquiring significantly fewer stocks of those institutions when compared to companies with more assets.
It should be noted that a high value of assets under management does not always mean higher returns generated by the respective Mutual Funds. The performance of Mutual Funds depends upon the dexterity of the concerned portfolio manager and his ability to gain market advantage through calculated predictions and smart investment choices.
Since the NAV of Mutual Funds having a low AUM is relatively lower, investors can make huge capital gains by investing in such schemes.
Calculation of AUM
The process to calculate AUM may vary depending on a particular fund house. It usually rises when investments offer a consistent positive return for a long period.
Positive performance attracts new assets and more investments, which increases the total amount of assets for that organisation. However, the asset value decreases every time the market plummets or investors redeem his or her shares.
The total value of assets under management is constantly fluctuating, depending upon the market performance of the portfolio assets. The net changes in the value of AUM are reflected at the end of trading when the market closes for the day.
The total valuation of an asset management company is crucial information for all investors so as to determine the rate of profitability earned if invested in such Mutual Funds.
AUM and Expense Ratio
The total amount deducted from the returns of Mutual Funds is used to regulate smooth working operations and ensure proper administration and management of the same. These overheads are known as the expense ratio incurred, specific to each Mutual Fund.
The expense ratio of a specific fund depends on the size of the AUM, as a higher value of assets requires more time and effort for optimal management.
Thus, AUM has a direct relation with the expense ratio levied by Mutual Funds, implying higher charges incurred while investing in Mutual Funds of a relatively larger size. However, the SEBI regulations stipulate that the expense ratio of a Mutual Funds has to be strictly less than its AUM.
Difference Between AUM and NAV
- AUM is basically the total market value of all the assets held within a mutual fund. It can include stocks, bonds, cash, etc. NAV, on the other hand, is the market value of securities divided by the total number of units on a certain given date.
- AUM can fluctuate oftentimes based on the performance of the fund’s underlying assets. NAV is usually computed at the end of every trading day, and it may change daily on the basis of asset performance.
- AUM is used to assess the mutual fund’s size to investors. NAV is used for determining the per-unit value of the fund for purchasing/selling shares.
Related Mutual Fund Pages
SIP | Lumpsum |
AUM | Systematic Transfer Plan |
Exit Load | Mutual Fund Units |
Expense Ratio | Childrens Fund |
NAV | Interval Funds |
Systematic Withdrawal Plan (SWP) | Emerging Market Funds |
Hedge Funds | Benchmark |
