What is AUM?
The AUM full form is Asset Under Management. It is simply the market value of the entire fund that the mutual fund manages on behalf of the investors.
Let us put it this way. There are thousands of investors investing in one single mutual fund. Some invest using SIPs, and some just put in a lump sum.
The fund manager invests the entire corpus in equities, debentures, govt. securities, or any other instrument, based on the objectives of the mutual fund. The total value of all such investments is known as AUM. Therefore, if a mutual fund manages investments valued at ₹2,000 crore, then its AUM will be ₹2,000 crore.
How to calculate AUM
The formula for AUM calculation is simple.
AUM = Outstanding Units × Current NAV
This implies that AUM relies upon:
- The number of units in the mutual fund held by the investors.
- The value of each unit.
For instance, if a mutual fund holds 2 crore units with NAV of ₹120 per unit, then the calculation will be:
2 crore × ₹120 = ₹240 crore
So the fund’s AUM is ₹240 crore.
Since there is a change in NAV every day, AUM will also see regular changes. This is the reason why the mutual fund companies update this figure on a regular basis.
What changes AUM?
AUM is constantly on the move due to movements in the market and investor base. There are some key factors that impact AUM.
Investor inflows
With new investors entering the fund or additional investments by existing investors through SIP and lump sums, AUM increases.
Redemptions by investors
If the investors pull out money from the fund, the size of total assets of the fund decreases, hence lowering AUM.
Market performance
When the stock or bond prices in the portfolio increase, the AUM increases. When there is a market correction, the AUM decreases.
IDCW distribution
There are some funds which give part of their income back to the investors through the IDCW distribution scheme. As there is an outflow of cash from the fund, AUM will decrease.
Scheme mergers
Sometimes the two mutual fund schemes may be combined together. In this case, there will be a combination of the assets, and AUM will also change..
Therefore, AUM is not static. It's always moving.
Why AUM matters
AUM does not tell you whether a mutual fund will give the best returns next year. But it still tells you something useful.
It shows fund size
One thing that AUM tells you is the size of a fund. A fund with ₹50 crore AUM and another fund with ₹20,000 crore AUM run entirely different businesses. It doesn’t mean that the second fund is better than the first, but it helps you get an idea of the size of the fund.
It shows investor interest
A consistent growth in the AUM of the fund generally indicates investor interest in the fund. This could be due to many reasons, including reputation, popularity, or good track record. However, you should not let popularity influence your decision.
It should be read with other metrics
This is the most important part. AUM must never be viewed in isolation. It will make better sense when compared with:
- Performance.
- Expense ratio.
- Risk.
- Quality of portfolio.
- Fund manager experience.
AUM makes more sense only after this comparative analysis.
Is higher AUM always better?
It is one of the biggest myths when it comes to mutual funds. Investors generally believe that a large AUM is an indicator of a good mutual fund. However, this is not how investment works.
A high AUM might imply that the fund is popular and might have existed for a considerable period of time with several investors. But it doesn’t ensure better performance.
A big asset pool provides a number of advantages for the fund itself. Firstly, it acts as an indication from the market that the fund is trusted by a community of investors.
Apart from that, it is economically reasonable for individual investors since the fixed cost of operation is divided among many people, which leads to lower expense ratios.
Finally, a bigger capital pool provides fund managers with more stability in managing daily flows of cash and dealing with investor redemptions without interrupting their main long-term investment policy.
When high AUM can be a challenge
When a mutual fund grows too large, being loaded with cash may become counterproductive for it. This is particularly applicable to funds specialising in small firms. Small firms do not have many stocks traded daily.
This means that a manager who is managing a mountain of money is unable to trade huge volumes of stocks without affecting their prices. Their size becomes a burden on them. In order to manage that excess cash, they usually need to make investments in alternatives or keep money that cannot be put to use.
Eventually, most funds end up closing their doors to any further investment from investors to prevent their performance from deteriorating.
AUM vs NAV
While people often mix up AUM and NAV, which is Net Asset Value. These two are quite different. Some of the key differences include:
Low NAV does not mean that the investment is undervalued. High AUM does not mean that the fund is superior. They are two completely different aspects.
How AUM size can make a difference
AUM of varying sizes have their own sets of advantages and disadvantages. Here is what they usually suggest:
Final thoughts
AUM is significant since it reflects the total value of money managed by a mutual fund, thus providing a sense of the fund's scale. However, you should remember that it is only one component of your research; it cannot serve as the last decision-making criterion.
A high AUM is not necessarily going to mean the fund will win. Likewise, a low AUM does not automatically mean that the fund will underperform. The key thing is whether the fund will suit your goals and risk levels.
