Let’s say you put money into a mutual fund. Several other investors will be investing in the same fund plan as you. The Assets Under Management value is calculated by adding all of the investments made by all investors (individual and institutional) (AUM). In this article, we’ve covered the following topics:

Assets Under Management

The whole market value of a mutual fund’s assets/capital is referred to as assets under management. On behalf of the investors, the fund manager manages these assets and makes all investment-related decisions. The AUM of a fund company is a measure of its size and success. It’s simple to compare a fund’s assets under management and performance over time and with other similar schemes.

The returns earned by a mutual fund are also factored into the AUM. The asset manager can invest it in securities, distribute it as dividends to investors, or keep it as is, depending on the investment mandate.  

Should you consider AUM before investing?

Investors in mutual funds generally look at the fund’s AUM and are impressed if it is high. People believe that if a large number of people have invested in a fund, it must be a good one. However, there are numerous reasons why this figure should not be considered when selecting a fund.

Some of the most significant elements to evaluate are the expense ratio, the fund manager’s reputation, and compliance with the investing mandate. Let’s look at the importance of AUM for various fund kinds.

Equity funds

AUM is less important than consistency in returns and the fund house’s compliance with the investment objective. We define consistency as outperforming the benchmark at all market highs and lows. As a result, rather than popularity or size, equity mutual funds rely on the asset manager’s ability to consistently deliver positive returns.

Debt funds

If you wish to invest in debt funds, AUM is an important issue to consider. Fixed fund expenditures can be shared over a larger number of investors in a debt fund with higher capital. As a result, the expense ratio per person can be reduced, resulting in higher fund returns. A larger fund’s asset base also aids the fund’s ability to negotiate fair rates with debt issuers.

Small-cap funds

After a certain point, small-cap funds tend to limit cash inflows. A well-known example is the DSP BlackRock Micro Cap Fund. This normally happens when a mutual fund’s assets exceed a certain threshold. If the fund becomes a major shareholder in a company, it may find it difficult to trade its shares when the market is volatile. This is why small-cap funds prefer to invest through SIPs rather than lump sums.

Large-cap funds

Let’s take a look at how AUM affects large-cap mutual funds using an example. Two large-cap equities funds are Mirae Asset India Opportunities and HDFC Top 200. The former has a market capitalization of Rs.4,738 crore, while the latter has a market capitalization of Rs.14,655 crore. For this reason, most people may choose to invest in HDFC Top 200. The Mirae, on the other hand, has historically achieved larger returns over time, as seen in the table below.

Fund name1-year returns3-year returns5-year returns
Mirae Asset India Opportunities21.35%16.54%20.81%
HDFC Top 20015.90%10.55%15.13%

Did you know?

The more assets under management (AUM) a debt fund has, the better. However, for equity funds, it should not be a deciding factor.

Impact of high AUM on mutual funds

The bloated AUM of an equity fund can sometimes have a negative impact on its performance. Nonetheless, there is no evidence that a bigger AUM has a negative or positive impact on fund performance. The fund manager is responsible for recognizing market opportunities and entering or exiting a stock at the ‘correct’ time. A greater asset-under-management has hampered the manager’s ability to make timely investment decisions in many circumstances. Before you invest, compare the performance of the fund you chose to the benchmark and its competitors.  

How to calculate AUM?

Assets under management are calculated in a variety of ways by fund companies. When a fund continuously generates good returns, its entire investment will rise. Positive results can attract new assets and investors, resulting in a higher AUM.

Similarly, a drop in the market value or investment performance can reduce the value of the assets. The same is true if the fund closes unexpectedly or if an investor redeems his or her stake. Capital invested across the company’s goods is included in assets under management, as are the shares of the company’s executives.  

Effect of AUM on expense ratio or fee

Every fund house charges a management fee that is proportional to the size of the fund. It is a flat fee for the entire fund; investors are charged based on the number of units they own. The performance of the fund has no bearing on the fees. It just covers administrative costs and determines the asset manager’s remuneration. The Total Expense Ratio (TER) is a measure of a mutual fund’s annual operating costs. The AUM must always be greater than the TER, according to SEBI.  

AUM and market movements

Market changes have a significant impact on the assets under control. The assets of the fund will climb when it produces profits and decline when it loses money. The mutual fund fee is also determined by this. Inferior expenses are usually associated with a lower value. Assume that 100 investors have deposited Rs.10,000 in a mutual fund that has returned 10%. The fund’s total assets under management (AUM) would then be Rs.11,000. After all, is said and done, companies employ several methodologies to determine the worth of the assets they manage.  

In a nutshell, AUM is a great tool to gauge the popularity and success of a fund. However, it should have no bearing on your decision to invest or not. You can always invest with Wealth Bucket if comparing these metrics seems too difficult. To meet a wide range of investment demands, we’ve chosen the best-performing portfolios.