Investing often carries the allure of instant wealth or risky market maneuvers. As an investor looking into mutual funds, you've likely encountered the term "Assets Under Management" (AUM). But what exactly does it mean, and why is it important for you to understand it?
This article will look into AUM, explaining its significance, calculation methods, and its relationship to other key mutual fund metrics such as the Total Expense Ratio (TER).
What are Mutual Fund Assets Under Management (AUM)?
Assets Under Management (AUM) signifies the total investment amount from multiple investors pooled within a specific Mutual Fund House. This pool of money is managed by a fund house, which assigns fund managers to handle it. The fund managers use this money, known as the AUM, to invest in assets such as stocks, bonds, or other mutual funds. The AUM represents the total market value of all these investments within a specific mutual fund scheme at any given time.
The AUM serves as a valuable indicator for several aspects of a mutual fund:
Fund Size and Reputation: A higher AUM generally signifies a larger and potentially more established fund house. Larger funds may have greater bargaining power with companies they invest in and might attract more experienced fund managers. However, size isn't everything.
Liquidity: Funds with a larger AUM are typically more liquid, meaning you can easily buy or sell your units without significantly impacting the fund's overall price. Conversely, smaller AUM funds might have lower liquidity, making it slightly trickier to enter or exit your investment.
Potential Economies of Scale: AUM can also be a factor influencing the fund's expense ratio. The expense ratio is a fee charged by the fund house, typically as a percentage of the AUM. This fee covers the management costs of the fund. While a larger AUM might suggest a potentially lower expense ratio due to economies of scale (spreading the fixed costs over a larger investor base), it's not always a guarantee. We'll explore this concept in more detail later in the article.
Importance Of Assets Under Management
Assets Under Management bear importance to you as an investor for the following reasons:
Fund Management and Performance: The AUM is directly managed by the fund house. Fund managers actively supervise the performance of these assets and make investment decisions to help investors achieve capital appreciation (growth in the value of their investment). In this sense, AUM can be viewed as a performance gradient and a size parameter of a fund house, reflecting their experience and ability to attract investors.
Investment Inflow and Quality: The AUM reflects the total value of the fund's holdings, which can include bank deposits, other mutual funds, and cash reserves. Higher AUMs can indicate better investment inflow, potentially signifying investor confidence in the fund house's management experience and the quality of the underlying investments. It's important to note that AUM itself doesn't guarantee superior returns, but it can be a starting point for your research.
Fund Fees and Liquidity: Fund houses typically charge fees as a percentage of the AUM. This fee structure can incentivize them to manage the AUM efficiently. AUM also influences liquidity. Funds with larger AUMs tend to be more liquid, as there's a greater pool of investors to facilitate buying and selling of units without significantly impacting the fund's price.
Fluctuating AUM: The AUM is a dynamic figure, fluctuating daily as the market value of the underlying holdings changes due to inflows and outflows from investors. This reflects the ongoing investment activity within the fund.
Calculating Assets Under Management (AUM)
The methodology for determining assets under management differs across companies and is dependent upon the influx and outflow of investor funds within a fund. However, in this article we will privide a simple example to give you an overview of how the calculation might look.
The calculation of AUM for a mutual fund is a straightforward process:
AUM = Number of Outstanding Units * Net Asset Value (NAV) per Unit
Number of Outstanding Units: This represents the total number of units currently held by investors in the fund.
Net Asset Value (NAV) per Unit: This refers to the market value of a single unit of the mutual fund. It's calculated by dividing the fund's total assets by the number of outstanding units.
In simpler terms:
Imagine a mutual fund has 100 crore units outstanding, and the NAV per unit is Rs. 10. The AUM of the fund would be:
AUM = 100 crore units * Rs. 10/unit = Rs. 1,000 crore
Understanding AUM Fluctuations
AUM is a dynamic figure that fluctuates daily due to two main factors:
Market Performance: As the market value of the underlying investments in the fund's portfolio (stocks, bonds, etc.) changes, the overall AUM adjusts accordingly. For example, if the stock prices in the fund increase, the AUM will generally rise. Conversely, if the stock prices decrease, the AUM will typically decline.
Investor Activity: When investors buy new units in the fund (subscriptions), the AUM increases. Conversely, when investors redeem their units, the AUM decreases.
Importance of AUM for Investors
While AUM isn't a direct indicator of a fund's future performance, it can provide valuable insights for investors:
Fund Size and Reputation: A higher AUM often suggests a larger and potentially more established fund house. However, size alone shouldn't be the sole deciding factor.
Liquidity: Funds with a larger AUM are typically more liquid, meaning you can generally buy or sell your units more easily without significantly impacting the fund's price.
AUM vs. Profitability
It's important to clarify that AUM itself doesn't directly determine the profitability (returns) you earn on your mutual fund investment. The fund's performance and the underlying investments are the key factors influencing your returns. The expense ratio, a fee charged by the fund house, is often calculated as a percentage of AUM, but it doesn't affect the profitability of your investment in the fund.
Assets Under Management (AUM) and Total Expense Ratio (TER)
The expense ratio, formally called the Total Expense Ratio (TER), is a crucial fee levied by the fund house. It's typically calculated as a percentage of the fund's Assets Under Management (AUM). This fee covers the operational costs associated with managing the fund, including investment management fees, administrative expenses, and marketing costs.
Impact of AUM on TER
SEBI (Securities and Exchange Board of India) regulates the maximum TER that a mutual fund can charge, with a tiered structure based on the fund's AUM. Here's a breakdown of the current TER limits (effective April 1, 2020):
AUM Range (Rs. Crore) | Maximum TER (Equity Funds) | Maximum TER (Debt Funds) |
Up to 500 | 2.25% | 2.00% |
500 - 750 | 2.00% | 1.75% |
750 - 2,000 | 1.75% | 1.50% |
2,000 - 5,000 | 1.60% | 1.35% |
5,000 - 10,000 | 1.50% | 1.25% |
10,000 - 50,000 | TER reduces by 0.05% for every additional Rs. 5,000 crore AUM | TER reduces by 0.05% for every additional Rs. 5,000 crore AUM |
Above 50,000 | 1.05% | 0.80% |
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Key Points to Remember:
A larger AUM can potentially lead to a lower TER due to economies of scale. With a bigger investor base, the fixed costs of managing the fund are spread over a larger pool, potentially reducing the expense ratio as a percentage of AUM.
However, AUM isn't the sole factor determining TER. The fund's investment strategy and actively managed vs. passively managed structure can also influence the expense ratio.
TER's Impact on NAV
The TER directly affects a mutual fund's Net Asset Value (NAV). The NAV represents the market value per unit of the fund. A lower TER generally translates to a higher NAV, as there are fewer fees eating into the fund's returns. Conversely, a higher TER can lead to a lower NAV.
Difference between AUM and NAV
As you navigate the world of mutual funds, you'll encounter two key terms: Assets Under Management (AUM) and Net Asset Value (NAV). While both are important, they represent distinct aspects of a mutual fund.
AUM: A Measure of Fund Size: Imagine a giant pool of money contributed by various investors like yourself. This pool represents the AUM, which reflects the total market value of all the investments held by a specific mutual fund scheme at any given point in time. These investments can include stocks, bonds, cash equivalents, and even other mutual funds.
NAV: The Per-Unit Value: NAV, on the other hand, focuses on the price of a single unit within the mutual fund scheme. It's essentially calculated by dividing the fund's total assets (represented by AUM) by the number of outstanding units held by investors. Think of it as the current market value per share of the mutual fund.
Key Differences and Implications
Here's a table summarising the key distinctions between AUM and NAV:
Feature | AUM (Assets Under Management) | NAV (Net Asset Value) |
Definition | Total market value of all the fund's holdings | Market value per unit of the fund |
Focus | Fund size and reputation | Price of an individual unit |
Calculation | AUM = Number of Units Outstanding * NAV per Unit | NAV = Total Assets / Number of Outstanding Units |
Fluctuation | Fluctuates daily based on market movements | Typically calculated daily, reflects daily performance |
Purpose for Investors | Assesses fund size and liquidity | Determines investment cost and potential returns |
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In simpler terms:
AUM tells you how much money the entire mutual fund holds.
NAV tells you how much a single unit of that mutual fund is worth on a particular day.
Remember:
A higher AUM might indicate a larger and potentially more established fund house, but it doesn't guarantee superior performance.
The NAV reflects the performance of the underlying investments and can fluctuate daily.
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Conclusion
Understanding AUM helps you make informed investment decisions. Although a high AUM can indicate a larger, potentially more established fund house, but it shouldn't be the sole deciding factor. Consider factors like your investment goals, risk tolerance, the fund's investment strategy, and its expense ratio before making your choice.
While AUM is a crucial metric, it is just one piece of a larger puzzle. For personalized guidance tailored to your unique financial situation, goals, and objectives, consulting a registered financial counselor is highly recommended. They can help you navigate your finances and create a personalized investment strategy that aligns with your risk tolerance and aspirations.
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