What is AUM (Assets Under Management) in Mutual Funds?
Assets under management (AUM) is the total market value of the investments that are held by the Mutual Fund. In simple terms, it is the money that the mutual fund is handling for their clients/investors.
For example, if an investor has invested Rs. 1,00,000 in a mutual fund, those funds become part of the total AUM. Post this, the fund managers can buy and sell shares following the fund‘s investment objective using all of the invested funds which leads to capital appreciation.
Generally, the performance of the mutual fund is reflected by its asset under management. A better performance would imply more assets under management but investors should not make this as a sole factor on which they should make the investment.
The value of the asset under management includes bank deposits, mutual funds, etc. A higher AUM allows the fund manager to take harder calls in terms of entry and exit strategy for a particular investment. Fund houses calculate their fees as a percentage of the total assets under management. AUM usually fluctuates on a daily manner, showing the inflow and outflow of resources from the organizations that fund houses invest in. The funds that carry more assets are more liquid in nature.
Importance of AUM in Mutual Funds with respect to various Investment Options
Mutual Funds Assets Under Management holds significant weightage to affect its performance in the financial market. It primarily depends on the fund houses; these organizations prefer asset-rich companies as they are more favored amongst customers.
It is important to analyze the assets under management since it reflects the size and success of the company. The success of the company becomes an important factor, though not the only one, that investors can consider before making any investment.
Below is the importance of the AUM with respect to various investment options:
Equity funds are less dependent on the asset under management as the performance of the fund is dependent on the Fund Manager. Depending on the decisions taken by the fund manager according to the market conditions, the returns can either be low or high.
If you are investing in debt funds, asset under management is something the investor cannot ignore. A debt fund with more assets under management can spread the fixed fund expenses across the number of investors it has. This eventually leads to a lowering of the expense ratio and an increased return for the investor.
Small-cap funds are not affected by assets under management. Such funds generally avoid lump-sum investments and stick to the SIP model. The reason behind this is to avoid the fund from becoming a significant holder in the company.
Investors generally prefer to invest in funds having a higher asset under management. A higher asset under management does not always mean higher returns and is dependent on various factors. The returns earned from large-cap funds are more dependent on the yield rather than assets under management.
Impact of High AUM on Mutual Funds
A higher asset under management is not necessarily an indication of how the fund is performing. The performance of the fund really depends on the decisions taken by the fund manager. These decisions include entry and exit strategy for a particular investment, the period of holding, etc.
While having a huge asset fund allows a manager to take advantage of the ever-changing market opportunities, investors should not only consider the asset under management but also the returns generated by it over a period against its benchmark returns.
AUM Asset Management Company Calculation for Mutual Funds
Different fund houses deploy different methods to calculate the asset under management. The positive performance of the fund attracts new investment and more assets. This leads to an increase in the asset under management of the fund.
On the other hand, decreased investor inflow, change in market value, redemption by the investor, fund closure, etc. leads to a decrease in the overall value of the assets.
The total value of assets under management keeps fluctuating depending on the market conditions and changes in the value of the portfolio investments. The net changes in the value of the AUM is reflected at the end of each trading day.
AUM in a Mutual Fund
A higher Asset under management does not always indicate the positive performance of a fund. A fund manager is responsible for taking the decisions related to entry and exit strategy for a particular investment, taking advantage of the changing market opportunities, etc. Based on the decision taken by the fund manager, the investors enjoy a capital appreciation in the investments.
The MF Industry’s AUM has grown from ₹ 12.02 trillion as on 28th February 2015 to ₹27.23 trillion as on 29th February 2020, about 2 ¼ fold increase in a span of 5 years. Assets Under Management (AUM) of the Indian Mutual Fund Industry as on February 29, 2020, stood at ₹27,22,937 crore.
AUM and Expense Ratio
Fund houses levy a management fee on the basis of the asset under management. It is a flat rate charged on the total asset fund and is dependent on the number of units that the investor holds. These are deducted from the returns of the Mutual Funds and are used to ensure smooth functioning of the fund house and it forms part of the total expense ratio (TER) of the fund.
Generally, large fund houses manage significant assets under management which requires experts who can manage the funds due to which their expense ratio is also at a higher end. However, SEBI has mandated that the TER should always be lower than the asset under management of the fund.
AUM and Market Expectations
The asset under management of a fund is impacted by the prevailing market situations. If the market is on the rise, the returns will increase and when the market is falling down, it incurs losses. With the increase and decrease in the market, the asset value also increases and decreases.
The change in the asset value demotes to the change in the asset under management of the management companies. This also determines the mutual fund fee. Lesser value generally means lower costs.
Let us understand this with the help of an example:
50 investors have cumulatively and collectively invested Rs 20,000 in a mutual fund scheme. The return earned by the mutual fund scheme is 10%. Here the asset under management for the mutual fund scheme will be Rs 22,000.
On the contrary, if the return earned by the mutual fund scheme is 1%. Here the asset under management for the mutual fund scheme will be Rs 20,200.