What is AUM (Assets under Management) in a mutual fund?

Asset Under Management (AUM) is the indicator that gives us the total size of the mutual fund portfolio. It is the summation of the values of each asset that the investment manager manages on behalf of investors. Understanding AUM is quite essential for investors. So let's dive deep into it. 

 

AUM Simplified

AUM stands for Assets Under Management, which refers to the total market value of assets that a financial institution or investment company manages on behalf of clients. These assets can include various types of investments such as stocks, bonds, real estate, and alternative investments like hedge funds or private equity. AUM is a key metric used in the financial industry to assess the size and scale of an investment manager's operations and the level of trust and confidence clients have in their management abilities. It also plays a crucial role in determining fees charged by investment firms, as they often charge a percentage of AUM as management fees.

 

The Importance of AUM

AUM plays a significant role in the financial landscape for various reasons. A few of them are listed here.

1. It reflects the size and scale of investment firms. Firms with higher AUM are considered to be established and capable of managing larger volumes of funds.
2. Investment firms earn fees based on the percentage of AUM of the schemes. The higher the AUM, the higher the fee the firm earns. 

 

How is AUM Calculated?

It is quite straightforward to calculate AUM with a formula where the total number of units held by investors is multiplied by the current market price of each share or unit.

Here is the AUM calculation Formula

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

For example, if any mutual fund has 1 Cr shares of each worth INR 30 then AUM will be

( 1 Cr shares) * (INR 30 per share) = INR 30 Cr.

 

What Is the Fee charged for AUM?

The AUM fee is charged based on the total balance of the investment advisor that manages the portfolio. In general, it ranges between 0.5 per cent to 2 per cent per year. However, it might vary based on the type of scheme i.e. equity , debt , open ended , close ended etc.

 

Challenges to Manage High AUM

There are several challenges to managing high Asset Under Management. Some of them are listed here.

As AUM increases, it becomes more challenging to generate consistent returns. The larger the assets, the less flexibility in making investment decisions.

High AUM often concentrates on a risk where a significant part of assets are invested in a small number of asset classes and securities. It becomes quite complicated to manage risks as it might impact individual positions.

 

AUM vs. NAV

NAV or Net Asset Value presents the value of each share of mutual fund assets while AUM is the total value of assets that a mutual fund manages on behalf of investors across different types of mutual funds.

 

Conclusion

In Conclusion, AUM offers a comprehensive measure of the total value of assets managed by a fund house that can be used to attract new investors and predict the size and scale of the company. By considering AUM, investors can gain a comprehensive understanding of fund houses and make informed decisions while making Mutual Fund Investment.

 

FAQ

1. How does AUM affect a mutual fund’s liquidity?

As AUM increases, the fund may need to make larger trades to accommodate investor inflows and outflows which impact the market liquidity.

2. Can a mutual fund’s AUM be a measure of its performance?

An AUM cannot be directly used to measure mutual fund performance. However, the higher value of AUM indicates that investors hold confidence and support the mutual fund. 

3. What happens when AUM increases?

If AUM increases then the fund manager needs to invest in more resources to diversify the portfolio and spread the risk. Further, there are also challenges related to liquidity, market impact etc.

4. What role does investor behaviour play in influencing a mutual fund’s AUM?

A few of the key factors that influence the AUM are investors’ sentiment, market trends and economic conditions. 

5. Does a higher AUM always mean a better-performing mutual fund?

No that is not always true. A larger AUM does provide some benefits like increased resources however it does not guarantee any significant investment returns.

 

Disclaimer

Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY