What is AUM in Mutual Funds? A Simple Step-by-Step Guide for Beginners

AUM stands for Assets Under Management. It refers to the total market value of all the investments made by investors in a mutual fund scheme at a given point in time.

In simple terms, it is the total money investors have put into that scheme. For example, if a mutual fund scheme has ₹5,000 crore invested by all its investors combined, its AUM is ₹5,000 crore. This value keeps changing based on new investments, withdrawals, and changes in the market value of the fund’s underlying assets.

How is AUM Calculated?

AUM is not a static number; it changes every single day. AUM changes primarily due to two main factors:

1. Market Performance: If the stocks or bonds held by the fund increase in value, the AUM goes up.
2. Investor Cash Flow: When new investors put in money (inflows), the AUM rises. When investors withdraw their money (outflows), the AUM falls.

The Formula:

AUM = (Market Value of all Securities) + Cash

AUM is the total value of a fund's portfolio: 

₹500 Cr (AUM) = ₹485 Cr in securities + ₹15 Cr in cash

Why Does AUM Matter to You?

The size of a fund tells you more than just its popularity. It directly impacts your costs and the fund's stability.

1. The Connection to Expense Ratio (Lower Costs)

Expense ratio is the annual fees the mutual fund charges to manage your investment. It is calculated as a percentage of the average asset under management (AUM), commonly ranging from 0.5% to 2%.

This is the most important reason to check AUM. As the AUM grows, the fixed costs of managing the fund are spread over a larger pool of money. 

SEBI (the regulator) has mandated that as a fund's AUM increases, the maximum Expense Ratio it can charge must decrease. Essentially, a larger AUM often leads to a lower fee for you, which means higher take-home returns.

2. Liquidity and Stability

A fund with a large AUM is generally more "liquid." If a few large investors decide to withdraw their money, a big fund can handle those withdrawals easily without having to sell its best stocks in a hurry. In a very small fund, a large withdrawal can force the manager to sell assets at bad prices, hurting the remaining investors.

AUM vs. NAV: What’s the Difference?

Investors often confuse these two terms. Here is a simple breakdown:

Is a Higher AUM Always Better?

Not necessarily. The "ideal" AUM depends on the type of fund:

• For Debt Funds: A higher AUM is almost always better. It provides better stability and lower expense ratios.
• For Large-Cap Funds: A high AUM is usually good, as these funds invest in very large companies that can easily absorb big investments.
• For Small-Cap Funds: A very high AUM can sometimes be a red flag. Small companies have limited shares available. If a Small-Cap fund becomes too large, the manager may struggle to find enough good small companies to invest in, which could slow down performance.

Common Myths About AUM

• Myth: A large AUM guarantees better returns.

Fact: AUM shows popularity and trust, not future performance. A large fund can be a "slow mover," while a smaller, more agile fund might give higher returns.

• Myth: A falling AUM means the fund is failing.

Fact: AUM can fall simply because the stock market is down. You should only worry if the AUM is falling because a massive number of investors are withdrawing money due to poor management.

Conclusion

AUM is a key indicator of a fund’s health, liquidity, and cost-effectiveness. While a high AUM often leads to lower fees (Expense Ratio), you should always look at it alongside the fund’s performance history and the fund manager’s track record. Don't just follow the crowd; choose a fund size that fits the specific investment strategy (Equity vs. Debt).