Assets Under Management (AUM) in Mutual Funds

There are only a handful of parameters to consider while picking mutual funds. One of them is Asset Under Management or AUM. It is one the easy parameters to understand compared to others - Alpha, Sharpe ratio, Sortino ratio, standard deviation, and more.

In this article, we explain AUM and help you understand everything related to it so you can pick the best mutual funds for yourself. So, without wasting any more time, let us get started.

What Does What is Assets Under Management AUM?

Let us look at the general technical definition first. Assets Under Management (AUM) is a key financial metric used to measure the total market value of the assets that an investment company, mutual fund, or financial institution manages on behalf of its clients. AUM is a vital indicator of the size and success of a fund or investment firm, reflecting both the performance of the investments and the trust that investors place in the company.

For example, if a financial firm manages Rs 160 crore in cash assets, Rs 1400 crore in fixed income, Rs 2000 crore in equities, and Rs 40 crore in alternatives, its AUM would be Rs 3600 crore.

Our focus in this article is mutual fund AUM. So, let us try to understand that also. AUM, in the context of a mutual fund, refers to the total market value of all the assets the mutual fund manages on behalf of its investors. The definition will make more sense in the next section.

How is AUM Calculated? How Does it Work?

In this section, we take a simplified example to help you explain how AUM works for mutual funds. It will involve numbers, so stay focused if you are uncomfortable with numbers. However, we attempt to keep it simple for everyone to understand.

The AUM in a mutual fund is calculated by considering three main factors:

• Inflows: It includes all the money that investors put into the mutual fund via lumpsum or SIP.

• Outflows: It represents the money leaving the fund through withdrawals.

• Market performance: The value of the current investments in the market also plays a significant role (discussed later).

The formula for AUM for mutual funds is:

• AUM = (Number of Shares or Units) x (Current Market Price)

Here,

• Current Market Price: It is the unit price of one share, which is also called NAV. When the underlying asset performs well, the current market price increases, and so does AUM, even if the second parameter remains the same. When the price falls, the opposite happens.

• Number of Shares (or Units): The total number of shares or units (net flows, which is inflow minus outflow) that the mutual fund has issued to its investors. As more people buy the mutual fund units, the number of shares increases, and so does the AUM.

For example, let us assume that a mutual fund has outstanding 1,00,00,000 (1 crore) shares. Also, each share is worth Rs 500. The AUM calculation of the mutual fund would be as follows:

• AUM = (1,00,00,000 shares) x (Rs 500 per share) = Rs 500 crore

Why is AUM Important for Investors?

As mentioned earlier, AUM is an important parameter for mutual fund evaluation. Here is why it is essential:

• Provides Perspective on Fund Size: A higher AUM generally indicates a larger and more established fund. However, it is not the sole measure of a fund's performance.

• Potential for Expense Ratio Impact: Larger funds might have lower expense ratios (fees charged by the fund) due to economies of scale. The expense ratio includes different types of fees, and a large part of it, is fixed (salary, rental, etc). So, when the AUM increases, the expense ratio comes down.

• Liquidity Considerations: Generally, larger funds (with higher AUM) tend to be more liquid, meaning you can easily buy or sell their shares. This point makes sense when there is a panic situation in the market, and many investors submit withdrawal requests on the same day. A mutual fund with a small AUM will have lower liquidity (cash) and may be unable to give you your money immediately.

What is the Difference Between AUM and NAV?

No, AUM and NAV in mutual funds are two different concepts. And you should not confuse the two. Let us look at the differences for your understanding:

What Are the Limitations of AUM?

Before leaving, we want to highlight a couple of important points related to AUM, which you should make a note of:

• Doesn't Reflect Performance: AUM does not directly tell you how well the fund has performed. A fund with a higher AUM does not mean a better fund. You must look at the fund's returns to assess its performance.

• Focus on Size, Not Strategy: A large AUM can used to shortlist funds, but a high AUM does not necessarily mean a good investment choice. Consider the fund's investment objective and risk profile before investing.

Conclusion

AUM is a vital metric in the mutual fund industry, offering insights into the fund's size, performance, and investor confidence. AUM influences the revenue generation for fund managers and reflects the overall health and growth of the mutual fund. Understanding AUM helps investors make informed decisions about their investments and assess the credibility and success of mutual funds. And we hope we have been able to make you understand AUM.