What Is Asset Under Management (AUM)?
The concept of Asset Under Management (AUM) in 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. 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 assets 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.
Importance of AUM in Mutual Funds
Assets under management are crucial indicators that provide valuable insights into a mutual fund's characteristics, performance potential, and investor confidence. Understanding AUM helps investors make informed decisions about their mutual fund investments.
Fund Size Indicator
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, indicating market confidence and stability.
Performance Impact
The AUM can have a direct impact on the fund's performance. If a fund has large AUM, it might be challenging to generate high returns due to limited investment opportunities. Smaller funds may have higher flexibility to benefit from other investment opportunities.
Fee Structure
A mutual fund's AUM can have a large impact on the fees that an investor usually pays. Some larger funds might have a very high minimum investment, which may limit access to a large chunk of investors. However, larger AUM can also help spread expenses across more investors.
Impact of AUM on Different Fund Types
The impact of Asset Under Management varies significantly across different types of mutual funds. Understanding how AUM affects each fund category helps investors make better investment decisions.
| Fund Type | AUM Impact | Key Considerations |
|---|---|---|
| Equity Funds | Moderate Impact | Equity funds depend less on AUM and more on the asset manager's skill to boost returns. Ideally, equity funds should offer good returns and outperform the benchmark index through market highs and lows. |
| Debt Funds | High Impact | 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 | Low Impact (until threshold) | 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. |
| Large-Cap Funds | Low Impact | 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. |
How AUM is Calculated
The process to calculate AUM may vary depending on a particular fund house. Understanding how AUM changes helps investors track fund performance and make informed decisions.
Factors That Increase AUM
- Consistent positive returns over a long period attract new investments
- New investor inflows increase the total amount of assets
- Appreciation in value of underlying portfolio assets
- Reinvestment of dividends and capital gains
Factors That Decrease AUM
- Market downturns causing depreciation in portfolio value
- Investor redemptions and withdrawals from the fund
- Poor fund performance leading to investor exits
- Distribution of dividends reducing asset base
Important Note
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 Relationship
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.
Key Points About AUM and Expense Ratio
Direct Relationship
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.
SEBI Regulations
SEBI regulations stipulate that the expense ratio of a Mutual Fund has to be strictly less than its AUM. This ensures that fund houses cannot charge excessive fees relative to the assets they manage.
Economies of Scale
Larger AUM can help spread expenses across a larger group of investors, potentially decreasing fixed fund expenses per individual. However, very large AUM might require more complex management structures.
Fee Calculation
Fund house fees are often calculated as a percentage of the total Asset Under Management. This means that as AUM grows, the absolute amount of fees collected also increases, even if the percentage remains constant.
Difference Between AUM and NAV
Understanding the distinction between AUM and NAV is crucial for mutual fund investors. While both are important metrics, they serve different purposes and provide different insights into fund performance.
| Aspect | AUM | NAV |
|---|---|---|
| Definition | Total market value of all assets held within a mutual fund | Market value of securities divided by total number of units |
| Components | Includes stocks, bonds, cash, and all portfolio assets | Per-unit value calculated from total portfolio value |
| Fluctuation | Can fluctuate based on performance of underlying assets and investor flows | Computed at end of every trading day, changes daily based on asset performance |
| Purpose | Used to assess the mutual fund's size to investors | Used for determining per-unit value for purchasing/selling shares |
| Investor Use | Helps evaluate fund size, stability, and investor confidence | Essential for calculating investment value and transaction prices |
Key Takeaways for Investors
AUM as Performance Indicator
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. However, remember that high AUM does not always guarantee high returns.
Low AUM Opportunities
Since the NAV of Mutual Funds having a low AUM is relatively lower, investors can make huge capital gains by investing in such schemes. 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.
Final Thoughts
Asset Under Management (AUM) is a crucial metric that provides valuable insights into a mutual fund's size, stability, and investor confidence. While higher AUM often indicates market trust and fund stability, it's important to remember that AUM alone doesn't guarantee superior returns. The performance of mutual funds depends significantly on the portfolio manager's expertise and ability to make smart investment decisions. Investors should consider AUM along with other factors like expense ratio, fund performance history, and portfolio manager's track record when making investment decisions. Understanding how AUM impacts different fund types and its relationship with expense ratios helps investors make more informed choices in their mutual fund investment journey.