- What is AUM (Assets Under Management)?
- How is AUM Calculated?
- High AUM vs. Low AUM: Pros and Cons
- AUM by Fund Category
- Why AUM Matters to You
- Common Mistakes to Avoid
- Conclusion and Your Action Plan
As you start researching, you encounter terms like ‘NAV’, ‘Expense Ratio’, and the big one, ‘AUM’. If you ask me, it can feel overwhelming, right?
Don't worry, let me simplify this for you, step by step. In the next few minutes, you will understand exactly what AUM is, why it is a critical factor you can't ignore and how you can use this knowledge to choose the right mutual fund. And by the end of this article, you will be a much more confident and informed investor.
What is AUM (Assets Under Management)?
To begin, let’s tackle the main question head-on: What exactly is AUM? The full form of AUM is Assets Under Management. Plus, it is simply the total market value of all the investments that a particular mutual fund scheme is managing on behalf of all its investors.
Imagine thousands of investors, including people like you and me, putting their money into a single mutual fund scheme. One person invests ₹5,000, another invests ₹50,000, and a large company might invest ₹5 Crores. The fund manager takes this entire collected pool of money and invests it in various stocks, bonds, or other securities. The total current value of this entire pool of investments at any given time is the fund's AUM. It’s a direct measure of how big the fund is.
How is AUM Calculated?
Here's what I mean: calculating the AUM is actually quite straightforward. You don't need to be a math genius to understand it; the Asset Management Company (AMC) does the calculation for you daily. It's kind of like. But knowing the formula helps in understanding the concept clearly. So the calculation this year is based on two key components: the total number of units issued by the fund to all its investors and the current market price of one unit, which is known as the Net Asset Value (NAV).
The formula is:
AUM = (Total Number of Units Held by All Investors) x (Current NAV per Unit)
For a practical example, let's say a mutual fund has a total of 10 crore units issued to its investors. If the NAV of the fund today is ₹250 per unit, then the AUM would be 10 Crores multiplied by ₹250, which equals ₹2,500 Crores. It’s that simple! This number changes every day as the NAV of the fund fluctuates with the market and as investors buy or sell units.
High AUM vs. Low AUM: Pros and Cons
Now we arrive at the most common question I receive from new investors: Should I invest in a fund with a huge AUM of ₹50,000 Crore or a smaller, newer fund with just ₹500 Crore?" Hmm, it’s a good question, and the answer isn't as simple as 'bigger is always better'. Look, the truth is that both high AUM and low AUM funds have their specific advantages and disadvantages. To make an informed choice, you must understand these nuances.
Now, let's break it down in a table.
| Factor | High AUM Funds (e.g., > ₹20,000 Cr) | Low AUM Funds (e.g., < ₹1,000 Cr)
|
|---|---|---|
| Pros | Stability & Trust: Large AUM indicates that many investors have trusted the fund, often for many years. And it suggests a proven track record. Lower Costs: SEBI regulations mandate lower fees (Expense Ratio) for larger funds (I know, right?). This means more of your money stays invested. Handles Large Transactions: Can easily manage big investments and withdrawals without significant price impact. | Flexibility & Agility: A smaller fund is like a speedboat; it can move quickly. The fund manager can swiftly buy or sell stocks, especially smaller ones, to capture growth opportunities. Plus, Potential for Higher Returns (Alpha): Can invest in hidden gems or smaller companies that large funds can't, potentially leading to outsized returns. |
| Cons | Less Flexible: A massive fund is like a large cargo ship; it's difficult to change course quickly. It may miss out on fast-growing small companies because the investment amount would be too small to impact its overall portfolio. Difficulty in Generating Alpha: Because of its large size, it may be difficult for the fund to significantly outperform the market index (trust me on this). Its performance might start mirroring the index. Look, | Higher Risk: Can be more volatile. A few wrong investment decisions by the fund manager can have a much larger negative impact on the overall fund. Though Higher Costs: Generally have a higher expense ratio, meaning more of your returns are eaten up by fees. Liquidity Risk: May face challenges if a large number of investors decide to withdraw their money at the same time, forcing the fund to sell assets at a bad price. |
AUM by Fund Category
It strictly depends on the category of the fund. For Large-Cap Funds, which invest in India's top 100 companies, a high AUM is generally a positive sign. These large companies can easily absorb huge investments, so stability and lower costs are key advantages. Still, for Small-Cap Funds, a very high AUM (for instance, over ₹25,000 Crore) can become a significant disadvantage. The fund manager has so much money that they struggle to find enough good small-cap companies to invest in, which can seriously hamper the fund’s performance.
Why AUM Matters to You
Let's think about this from your perspective. So why should all this theory about AUM matter to you, an investor with an income between ₹3-15 lakhs, who just wants to grow their money? It matters directly to your pocket in three critical ways: your costs, your returns, and your safety.
- Your Costs (Expense Ratio): SEBI, which is the market regulator in India, has created rules to protect you. You know, now, these rules state that as a fund’s AUM increases, the fund house *must* reduce its management fees (the Total Expense Ratio or TER). For example, a fund with an AUM of ₹500 Crore can charge a higher fee than a fund with an AUM of ₹50,000 Crore. A higher AUM often means you pay lower charges, leaving more returns in your account.
- Your Returns (Performance): As we discussed, AUM directly impacts a fund manager’s flexibility. Plus, when a small-cap fund's AUM becomes too large, the manager faces a problem. They currently have too much cash to invest in the limited number of good small-cap stocks. This can lead to a situation called 'style drift', where the fund starts investing in larger, mid-cap stocks just to deploy the cash. Actually, this changes the very nature of the fund and can dilute its potential for high returns.
- Your Safety (Liquidity): A fund with a higher AUM generally provides a safety cushion. It means the fund can handle large redemption requests (many people taking their money out at once) more easily. And during a market panic, this is crucial. A smaller fund might be forced to sell its good investments at a loss to pay back investors, which hurts everyone who remains invested. Here's the thing: A larger AUM provides better stability in such scenarios.
Common Mistakes to Avoid
Before you start analysing funds, let me point out a few common mistakes that beginner investors make when they look at AUM. Avoiding these pitfalls will directly help you protect your hard-earned money. Here's what I mean:
- Mistake #1: Only Chasing High AUM Funds. Do not assume that the fund with the highest AUM is the best. Massive AUM is often a sign of good past performance and strong marketing, not a guarantee of future success.
- Mistake #2: Completely Ignoring AUM. On the other hand, you can't ignore this number. AUM is a vital clue about a fund's strategy, its potential challenges, and its cost structure. Look, from what I've seen. Please pay special attention to this when reviewing small- and mid-cap funds.
- Mistake #3: Comparing AUM Across Categories. It is pointless to compare the AUM of a large-cap fund with that of a thematic or small-cap fund. Their investment universes are completely different. Always compare AUM among funds within the same category.
Conclusion and Your Action Plan
Honestly speaking, to conclude our discussion, let’s quickly recap. AUM is the total money managed by a fund, indicating its size. Though it’s not just about 'high vs. low', it's about finding the 'right' AUM for the fund's specific category. When making your decision, you must consider all the factors we discussed.