Assets Under Management (AUM) in mutual funds is the total market value of the investments that a mutual fund manages on behalf of its investors. These investments can include stocks, debt instruments, or other securities that form a part of the mutual fund portfolio. AUM indicates the scale of a fund’s operations. Understanding AUM’s meaning can help investors gauge a fund’s size, performance, and credibility.
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Calculation of assets under management (AUM)
AUM is calculated by summing up the market value of all the assets of a mutual fund. The AUM of a mutual fund is a dynamic number because it depends on the market value of the underlying securities, which fluctuates frequently. Thus, the AUM rises when the investments are performing well. It can also rise when more units are purchased in a scheme. On the contrary, when the market drops or when investors opt to redeem units, the AUM may decrease. Since this value varies from day to day, its net change is usually noted daily after the market closes.
Importance of AUM in mutual funds
The importance of Asset Under Management can be understood through the following aspects:
Provides operational scale: A larger AUM may allow fixed operating expenses to be spread across a broader asset base, although this does not necessarily translate into better investor outcomes.
Indicates scheme size: AUM helps investors understand the scale of a mutual fund scheme and the amount of assets entrusted to the fund manager.
Reflects investor participation: Changes in AUM may result from fresh investments, redemptions, and movements in the value of the underlying portfolio.
Influences portfolio management: The size of a scheme may affect how fund managers deploy capital, particularly in segments such as small cap stocks where liquidity may be relatively limited.
Difference between AUM and NAV
AUM and NAV (Net Asset Value) are two important mutual fund metrics, but they measure different aspects of a scheme. While AUM indicates the total value of assets managed by a mutual fund scheme, NAV represents the per-unit value of the scheme.
| Parameter | AUM | NAV |
| Meaning | Total market value of assets managed by a mutual fund scheme | Per-unit value of a mutual fund scheme |
| Calculation | Sum of the market value of all assets in the scheme | (Total assets – liabilities) ÷ Total units outstanding |
| Purpose | Indicates the size of the scheme | Indicates the value of one mutual fund unit |
| Impact of inflows | Generally increases when investors invest more money in the scheme | Does not automatically increase because of new investments |
| Impact of market movements | Changes with fluctuations in the portfolio’s value | Changes based on the net value of the underlying assets |
| Use for investors | Helps assess scheme size and scale | Used to determine purchase and redemption prices |
AUM and investment management strategy
A mutual fund scheme’s Assets Under Management can influence certain aspects of its investment management strategy, although the impact varies depending on the fund category, investment universe, and market conditions.
The relationship between AUM and investment management strategy can be observed in several ways:
- Portfolio construction: The size of a scheme may influence how capital is allocated across securities, sectors, and market capitalisation segments.
- Liquidity considerations: Larger schemes may need to pay closer attention to liquidity when investing in securities with lower trading volumes, particularly in the small cap segment.
- Diversification opportunities: A larger asset base may enable broader diversification across multiple holdings while remaining aligned with the scheme’s investment mandate.
What does AUM tell potential investors?
Asset Under Management can provide insights into the following:
- Scheme size: A higher AUM indicates that the scheme manages a larger pool of assets, while a lower AUM reflects a smaller asset base.
- Investor participation: Changes in AUM may reflect investor inflows, redemptions, and changes in the market value of the underlying portfolio.
- Liquidity considerations: In certain fund categories, the size of the scheme may influence how fund managers manage liquidity and execute transactions.
- Portfolio management dynamics: The amount of assets under management may affect portfolio construction and investment execution, depending on the securities in which the scheme invests.
- Growth trends: Rising or declining AUM over time may provide context about changes in investor participation and market performance, although it does not indicate future outcomes.
AUM and expense ratio
The relationship between AUM and expense ratio is indirect. In some cases, a larger AUM may allow fixed operating costs to be spread across a larger asset base, which may contribute to a relatively lower expense ratio.
At the same time, larger AUM does not always result in lower expenses. For example, in a small cap fund, managing a growing asset base may become operationally more complex. Small cap stocks often have lower liquidity compared to large cap stocks, and deploying large amounts of capital without affecting market prices may require additional research, trading effort, and portfolio management resources.
Expense ratios are also influenced by factors such as the investment strategy, and regulatory limits prescribed by SEBI.
Impact of high AUM on mutual funds
Having a high AUM can be both an advantage and a challenge for mutual funds. A high AUM does not always equate to potentially better returns. A mutual fund’s performance depends on the fund manager’s expertise and their ability to make smart investment decisions.
Let’s look at the significance of AUM for different types of mutual funds:
● Equity funds: More than AUM, equity fund returns are influenced by the skills of the asset manager and the market movements. Within equity, here’s how the significance of AUM can vary:
● Large cap funds: The performance of these funds is primarily influenced by market yields and investment strategy rather than the size of their AUM. While large AUM can indicate how established a mutual fund company is, the actual scheme performance will depend on the decision making of the fund manager, including stock selection and performance of a stock. In fact, the fund manager’s strategic decisions in sector allocation, stocks selection, and timing may have a more significant impact on the returns than the size of the AUM itself.
● Mid cap and small cap funds: Here too, fund performance depends on investment strategy, market movements, and stock performance, rather than AUM. Moreover, since small and mid cap stocks are more volatile, the AUM can fluctuate significantly for such funds.
● Debt funds: A larger AUM value can mean reduced individual fixed fund expenses and relatively higher returns as the operating costs are spread over a more extensive asset base.
FAQs
What is AUM in mutual fund?
Assets Under Management (AUM) refers to the total market value of all investments managed by a mutual fund scheme. It includes investments made by all unitholders and reflects the overall size of the scheme. The general AUM formula is AUM=NAV per unit × Total Outstanding Units.
Does AUM affect NAV?
Asset Under Management and Net Asset Value (NAV) are related but measure different aspects of a mutual fund. A higher or lower AUM does not directly determine the NAV. NAV is calculated by dividing the scheme’s net assets by the number of outstanding units. Changes in portfolio value, expenses, and liabilities influence NAV more directly.
What is included in assets under management?
A mutual fund’s Asset Under Management generally includes the market value of equity shares, debt securities, money market instruments, cash holdings, and other permitted investments held by the scheme. The value of these assets changes with market movements and investor transactions, causing the scheme’s AUM to increase or decrease over time.
How to increase mutual fund AUM?
A mutual fund’s Asset Under Management may increase when existing investors make additional investments, new investors enter the scheme, or the market value of portfolio holdings rises.
