Assets under management (AUM) is a metric that tells the size of a mutual fund portfolio. It refers to the total value of all the assets that a financial institution or investment manager manages on behalf of its clients. Understanding AUM is vital for investors. Let’s look at it in detail.
What is Assets Under Management (AUM)?
In mutual funds, assets under management (AUM) is the total market value of all the assets, such as stocks, bonds, and other securities, that a mutual fund manages on behalf of its investors.
Mutual funds pool money from many investors to construct a diversified portfolio of assets managed by professional fund managers. The value of these assets constantly changes due to market fluctuations, which affects the AUM of the mutual fund.
AUM is an important metric for mutual funds as it reflects the size of the fund and can be used as a measure of the fund’s success in attracting and retaining investors. It is also used to calculate the expense ratio charged by mutual funds. The higher the AUM, the more revenue an AMC can generate from its funds.
Calculation of Assets Under Management
Fund houses use different ways to calculate the AUM. A fund’s AUM is a function of three variables: inflows, outflows, and market price. At any point in time, both inflows and outflows are happening, so one can also see the net flows (inflows minus outflows). Positive net flows often (though not always) result in a rise in assets. A rise in the market price of the underlying asset can also result in a rise in AUM (again, not always).
If net flows are positive and the market price rises, the AUM will increase. If net flows are negative and the market price also falls, the AUM will decline. If one is positive and the other is negative, whichever is bigger in quantum will drive the AUM change.
Importance of AUM in Mutual Funds
Here are some of the key reasons why assets under management are so important:
- Reflects the size and scale of a fund: The AUM of a mutual fund is a clear indication of its size and scale. A larger AUM generally indicates that a fund is well-established and has the resources to attract more investors and make larger investments. This can be attractive to investors who are looking for a fund with a solid track record and strong growth potential.
- Impacts a fund’s investment decisions: The size of a fund’s AUM can have a direct impact on its investment decisions. For instance, when a small-cap fund becomes large, it may find it difficult to deploy money, given that its universe has companies of small sizes. It will find it difficult to get meaningful exposure in its desired companies.
- Influences a fund’s performance: The performance of a mutual fund can be affected by its AUM. A fund with a large AUM may find it more difficult to achieve high returns, as it may be more challenging to find investment opportunities that can generate significant gains without disrupting the market. On the other hand, a smaller fund may have more flexibility to take advantage of unique investment opportunities and generate higher returns.
- Impacts a fund’s fees: The AUM of a mutual fund can also impact the fees that investors pay to invest in the fund. SEBI has mandated a tiered structure for the expense ratio, wherein large funds have smaller fees and smaller funds can have higher fees. However, investors should be aware that larger funds may also have higher minimum investments, which could limit their accessibility to some investors.
Impact of AUM and Expense Ratio
When a fund house manages your money, it charges a fee based on that amount. This fee is a percentage of the total amount invested by the investor and is used to cover the costs of running the fund. The fee is deducted from the returns, and it is included in the total expense ratio (TER) of the fund.
SEBI has mandated that large funds will have lower TERs. Funds with smaller AUMs have been allowed to charge higher expenses. See the table below.
TER (%) | ||
| AUM (In Crores) | Equity funds | Debt funds |
0-500 | 2.25 | 2.00 |
500-750 | 2.00 | 1.75 |
750-2000 | 1.75 | 1.50 |
2000-5000 | 1.60 | 1.35 |
5000-10000 | 1.50 | 1.25 |
10000-50000 | Starts at 1.5%, and goes down by 0.05% for every rise of Rs 5000 cr in AUM | Starts at 1.25%, and goes down by 0.05% for every rise of Rs 5000 cr in AUM |
>50000 | 1.05 | 0.008 |
Impact of High Assets Under Management
The AUM of the Indian mutual fund industry has grown from ₹7.60 trillion in 2012 to ₹39.89 trillion as of December 31, 2022, an increase of five times over the past decade. This growth suggests significant potential for AMCs to continue expanding their operations.
Investors should not rely solely on the AUM to evaluate a fund’s performance. The size of AUM does not necessarily indicate a fund’s performance. It is important to note that high assets under management do not necessarily translate into higher returns. The fund’s performance is largely determined by the skill of the portfolio manager. Instead, investors should consider the returns generated by the fund over time compared to its benchmark, the risk the fund takes, the history of the fund, and the experience of the fund manager, among other factors.
Differences between AUM and NAV
AUM and net asset value (NAV) are both financial terms used in the investment industry but they represent different things. Here’s a comparison of AUM and NAV:
| Metric | AUM (Assets Under Management) | NAV (Net Asset Value) |
|---|---|---|
| Definition | The total market value of all assets held within a fund, including stocks, bonds, cash, and other investments. | The per-share or per-unit value of a fund is calculated by dividing the total value of assets minus liabilities by the number of outstanding shares or units. |
| Calculation | The sum of the market values of all the assets in the fund’s portfolio. | (Total Assets – Total Liabilities) / Number of Outstanding Shares or Units. |
| Reflects | The total size of the fund. | The per-share or per-unit value of the fund. |
| Changes Over Time | Can fluctuate frequently based on the performance of the fund’s underlying assets. | Typically calculated at the end of each trading day and can also change daily based on asset performance. |
| Key Use | Often used to assess the fund’s overall size and attractiveness to investors. | Used to determine the per-unit value of the fund for buying and selling shares or units. |
| Impact of Flows | Affected by inflows (investor contributions) and outflows (redemptions). | Does not directly reflect the impact of investor flows but can indirectly impact NAV if there are significant inflows or outflows. |
| Example | If a mutual fund has ₹2 lakh crore in assets, its AUM is ₹2 lakh crore. | If a mutual fund has 10 lakh shares outstanding and its total assets minus liabilities equal ₹5 crore, its NAV is ₹5 per share. |
Frequently Asked Questions
Which AMC has the highest assets under management?
As of June 2023, SBI Mutual Fund has the highest assets under management at Rs 7.9 lakh crore.
What is included in assets under management?
Assets under management include all the assets that a financial institution, fund manager, or wealth manager manages on behalf of its clients. This includes money invested in stocks, bonds, cash, real estate, and other investment vehicles.
How much AUM is good for a mutual fund?
There is no definite answer to this question. Since AMCs charge fees on their AUM, it’s only natural that they would want their AUMs to rise. That said, AMCs have also restricted flows into some of their funds from time to time whenever they thought that the fund has more money than it could deploy fruitfully.
From an investor’s perspective, again there is no definite answer. Generally speaking, equity investors should be wary of both very small and very large funds. Very small funds could be untested or even if they have a history, there could possibly be reasons for their remaining small. Very large funds may find it difficult to outperform their peers, given that they may not be very agile. However, don’t judge a fund on its AUM alone. Do see other metrics as well.
What is the difference between AUM and market cap?
AUM refers to the total value of the assets managed by a financial institution or fund manager on behalf of its clients. This includes all the money invested in the fund, whether it is held in cash, stocks, bonds, or other assets.
Market cap, on the other hand, refers to the total value of a company’s outstanding shares. It is calculated by multiplying the company’s share price by the total number of outstanding shares.
AUM can change as more money is invested or withdrawn from the fund, while market cap can fluctuate based on the changing value of a company’s stock price.
What happens when AUM increases?
When AUM rises, it means that the financial institution or fund manager is managing more money on behalf of its clients. This can lead to increased revenue for the financial institution, as expenses are charged on the AUM. A rise in AUM is often an indication of investor trust and confidence as well. If a fund does well, more investors want to invest in it.
