What is AUM in Mutual Fund: Assets Under Management Meaning, Importance, and Calculation

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What is AUM in Mutual Fund: Assets Under Management Meaning, Importance, and Calculation

Mutual funds are a popular way to grow your money. And one term you'll often come across is "Assets Under Management" or "AUM." So, what does AUM mean? Why is it important, and how is AUM in mutual funds calculated?

Understanding Assets Under Management (AUM) is key when dealing with mutual funds. AUM is the total value of all assets a mutual fund manages - a crucial piece of information that gives insight into the size and success of a fund. Read along to understand what AUM means in mutual funds, why it matters, and how it's calculated.

Curious about other vital mutual fund concepts? You might find our piece on 'How is Net Asset Value (NAV) Calculated in Mutual Funds?' interesting.

What is Assets Under Management (AUM) in Mutual Fund?

AUM includes assets like stocks, bonds, cash, and other types of investments. When we talk about mutual funds specifically, AUM reflects the money the fund company is handling for its investors. For instance, Gaurav invested ₹1,00,000 in a mutual fund. This amount becomes a part of the fund's overall AUM. Using this pool of investments, fund managers buy and sell shares, aiming to grow the invested capital.

AUM is a crucial aspect of mutual funds. The size of the AUM can decide the fund's popularity and the trust investors place in it. But a larger AUM doesn't always mean a better fund. It just reflects the size of the fund and its ability to attract investments.

Importance of AUM in Different Funds

The role of Assets Under Management (AUM) varies across different types of mutual funds. Let's explore how it impacts various fund categories.

Equity Funds

In equity funds, what matters more than the size of AUM is how consistently the fund delivers returns and sticks to its investment goals. A well-managed fund is one that consistently performs well, not just one that is big or popular. You can learn more about Equity Mutual Funds through our guide - "What are Equity Mutual Funds - Types, Benefits, Risks."

Small-Cap Funds

Small-cap funds might limit how much money they take in. They prefer regular investments through SIPs rather than large lump sums, especially when markets are unpredictable.

Mid-Cap Funds

Mid-cap funds generally manage less money than large-cap funds. They invest in companies that are not too big but not too small, usually ranking between 101 and 250 in terms of market size.

Large-Cap Funds

Large-cap funds invest in the biggest 100 companies and can handle managing a lot of money due to the liquidity of these large companies.

Debt Funds

AUM is a key factor in debt funds. A fund with more money can spread its fixed costs across more investors, potentially leading to lower fees per investor and higher returns. To understand how interest rate changes affect these funds, check out our article on the impact of RBI rate hikes on debt mutual fund investors.

Let's read the key reasons why AUM is so crucial:

AspectWhy it's Important
Size and ScaleA larger AUM indicates a well-established fund, attracting more investors and making larger investments.
Investment DecisionsAUM size can directly impact investment choices, especially for small-cap funds.
PerformanceBoth large and small AUMs have their pros and cons in performance, influenced by market opportunities and flexibility.
FeesAUM influences mutual fund fees, with SEBI mandating a tiered expense ratio structure based on AUM size.

Effect of AUM on Mutual Fund Fees

The fee (expense ratio) that mutual funds charge for managing your investments is closely tied to the Assets Under Management (AUM). This fee covers the fund's management and operational costs and is expressed as a percentage of the AUM.

SEBI, the regulatory body for securities and mutual funds in India, has set guidelines to ensure that the expense ratios are within reasonable limits, and these limits are based on the AUM.

How is AUM in Mutual Fund Calculated?

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

Inflows: This includes all the money that investors put into the mutual fund. It could be from new investors joining the fund or existing investors adding to their investments.

Outflows: This represents the money leaving the fund, which could be due to investors redeeming their shares or making withdrawals.

Market Performance: The value of the current investments in the market also plays a significant role. If the investments are doing well and their market value is rising, the AUM will increase. Conversely, if the investments are losing value, the AUM will decrease.

The net change in AUM is calculated by taking the inflows, subtracting the outflows, and then adding or subtracting the change in market value of the investments. It's a dynamic number, constantly changing with market conditions and investor behavior.

Impact of Market Movements on Assets Under Management (AUM)

The AUM of a mutual fund is significantly influenced by market movements!

1. Positive Market Performance: When the market is doing well, and the value of assets such as stocks and bonds goes up, the AUM also sees an upward trend. If 10 investors have pooled in ₹1,00,000 and the market provides a 10% return, the AUM would rise to ₹1,10,000.

2. Negative Market Performance: When the market is underperforming and asset values decrease, the AUM goes down, too. Using the above example, if the market dips by 5%, the AUM would drop to ₹95,000.

This interplay highlights the dynamic nature of AUM, which changes with the ebb and flow of market conditions.

Difference Between AUM and NAV

Assets Under Management (AUM) and Net Asset Value (NAV) are important terms related to mutual funds, but they serve distinct purposes.

Let's compare these two:

MetricAUM (Assets Under Management)NAV (Net Asset Value)
DefinitionThe total value of all investments in a fund.The value of one share or unit in the fund.
IndicatesThe size and scale of the fund.The per-unit worth of the fund's assets.
UsageHelps assess the fund's popularity and investor trust.Used by investors to buy or sell shares or units.
CalculationSum of all assets in the fund's portfolio.(Total Assets – Total Liabilities) / Number of Shares or Units.
ExampleA mutual fund managing investments worth ₹2 crore has an AUM of ₹2 crore.A mutual fund with assets of ₹5 crore, liabilities of ₹1 crore, and 1 lakh shares has a NAV of ₹40 per share.

Key Takeaways

Here are the main points we covered in the blog:

  • AUM represents the total value of all investments that a mutual fund manages.
  • AUM plays distinct roles in various types of mutual funds.
  • AUM directly influences the mutual fund's expense ratio, which is the fee charged to investors. A larger AUM can lead to a lower expense ratio per investor.
  • AUM is dynamic, changing with investor inflows and outflows, as well as market performance. Understanding these factors can help investors make more informed decisions.
  • AUM and NAV of mutual funds are two different concepts. AUM indicates a fund's total value and NAV represents the value of one share or unit in the fund.
  • What does AUM full form in mutual fund denote?

  • How is AUM different from NAV?

  • Does a higher AUM always mean a better fund?

  • How often does the AUM in mutual funds change?

  • What does 'assets' mean when referring to AUM?

  • What does the AUM full form in finance mean?

  • Why is it advised to invest in assets, not liabilities?