AUM, full form Asset Under Management, represents the total market value of assets a mutual fund or AMC manages on behalf of its investors. This article explains everything about AUM, its impact on mutual fund performance, fees, and highlights the top AMCs and funds in India to help you make smarter investment decisions.

What is an Asset Under Management?

Assets under management are the total asset/capital market value held by a mutual fund. The fund manager handles these funds and, on behalf of the investors, makes all investment-related decisions. The AUM figure helps in understanding the fund’s size and performance. Assets Under Management is also known as Funds Under Management.

A rising AUM indicates a high level of trust in the fund as more clients are deemed to have bought into the fund or older clients remain invested. A declining AUM suggests the reverse: bad results or a significant redemption that may or may not be related to the performance of the fund.

In terms of benefit to the fund management team, a higher AUM enables the fund manager to take tougher calls with regard to the entry and exit strategy. This is owing to the availability of funds in case of higher redemptions, and also the trust portrayed by investors.

The expense ratio charged by asset management companies is calculated as a percentage of the assets under management.

Importance of AUM 

AUM, though not the most important factor to consider while selecting a fund, can be an important factor nonetheless. A higher AUM generally implies that the fund has enough liquidity to wade through the tough times and meet redemption requests in case of pressure. 

In some cases, a higher AUM can also hurt the performance of the fund. For instance, in the case of a small-cap fund, a very large AUM can sometimes be detrimental. In case of not enough opportunities to be able to deploy all of the assets, one of two things would happen. Either the fund manager would need to keep the excess funds in money market instruments, thereby dragging the overall portfolio return lower. Or as a second option, the fund manager would need to invest the funds in riskier assets, which is even worse. 

For listed asset management companies, the AUM also helps analysts discover the company's stock valuation. 

All in all, from the investor's perspective, the AUM figure can provide a good indication of the credibility of the asset management company or fund manager.

Calculation of AUM

In a mutual fund, there are numerous ways of measuring the AUM. Put simply, if a mutual fund scheme generates stable returns for several years, the AUM rises significantly. This rise in AUM is normal as investors' wealth increases not only due to higher income produced by the scheme but also because new investors are drawn by such efficient performers.

When it comes to determining the management fee, AUM is most important. In proportion to the fund size, all fund houses charge a premium, called the expense ratio. The expense ratio covers the expenses of administration and operations. The upper limit of such expense ratios for mutual funds, which is a proportion of the AUMs, has specifically been mentioned by the Securities and Exchange Board of India (SEBI).

Importance of AUM in Mutual Funds

Assets Under Management, or AUM, is an important measure in the mutual fund world; it reflects the overall market value of the assets that a fund manages on behalf of its investors. Here's why AUM matters and how it affects different types of funds:

1. Indicator of Fund Size and Stability

AUM clearly indicates the size of a mutual fund. A high AUM generally indicates investors' confidence and a commanding market position of that particular fund. Large funds tend to gain more investors due to their perceived stability and established position in the market.

2. Influence on Fund Performance

AUM can directly affect the performance of a fund.

• Large AUM: When a fund gets very large, it may not be able to find suitable investment opportunities without disturbing the market. This restricts its potential to generate exceptionally high returns.
• Small AUM: Smaller funds are less restricted. They can invest quickly in niche or high-growth opportunities and therefore have the potential for higher returns due to their agility.

3. Effect on Fees and Minimum Investment

A fund's AUM will also influence the fees to investors. It may be that very large funds require a higher minimum investment, and thus are less accessible for a smaller investor. Conversely, funds with an increasing AUM would be able to spread costs across more people and therefore reduce the expenses per individual.

Impact of High AUM on Mutual Funds

AUM is a factor of great importance when it comes to the perception of a fund and its performance in the financial market. Many fund houses prefer managing asset-rich funds, as investors tend to trust large asset bases.

A study of 361 equity funds in 2012 revealed the following:

• About 170 funds had an AUM below ₹100 crore.
• Within that, 68% had an AUM below ₹50 crore.
• Yet, overall investments rose from ₹530 crore in 2008 to ₹3,841 crore in 2012, reflecting the underlying surge in AUM at the industry-wide level.

A high AUM enables fund managers to be highly responsive to market opportunities, getting in and out of investments efficiently when market conditions change. In addition, AUM is a yardstick used by investors to judge a fund's scale, stability, and historical performance.

How AUM Impacts Different Types of Mutual Funds

Equity Funds

Equity fund performance is more dependent on the skill of the fund manager rather than on AUM. The objective is to perform better than the benchmark over market cycles, and a larger AUM hardly impacts this ability significantly.

Debt Funds

In debt funds, the role of AUM is bigger. Larger debt funds could distribute fixed expenses across more investors, lowering the cost per investor and thereby improving returns. 

Small-Cap Funds

AUM typically has less influence on small-cap funds—until the fund gets extremely large. When AUM becomes too large, the fund often ends up owning a large portion of certain companies, which drastically reduces flexibility. Consequently, small-cap funds usually prefer SIP inflows over large lump-sum investments.

Large-Cap Funds

Large-cap fund returns are at the mercy of the market, whereas AUM is not a driving factor. Surprisingly, smaller AUM funds have sometimes outperformed much larger funds, proving that size isn't everything.

10 Largest AMCs in Terms of AUM

Largest Funds in Terms of AUM

WHY AUM MATTERS?

Different financial institutions have different methods of calculating AUM. Some of these differences are structural - one mutual fund will calculate differently than an advisory firm. Some as well are also based on preference. For instance, some institutions will have a broad definition of which assets they will count as per their discretion. This is not to say firms have total control over how they define AUM. The SEC also has rules that narrow down what can and cannot be included.

When it comes to calculating AUM, actually, some sort of portfolio management software will do the work for now. Where it may have involved a fair bit of manual number punching in the past, computers handle calculating the value and adding it all up now. Large mutual funds especially, are constantly updating their AUM, which they may also call net assets. 

Because the AUM calculations involve determining the market value of assets, any institution’s AUM will naturally fluctuate on a daily basis. This is because the value of investments like stock equity will fluctuate on a daily basis. This is because the value of investments like equity shares will fluctuate with the respective stock price. A mutual fund can start the day at Rs 5,000 Crores and might end at Rs 5,020 Crores or Rs 4,980 Crores, simply because the assets that exist are volatile and may increase and decrease in terms of value.

NAV VS AUM

NAV refers to Net Asset Value, which is the total value of the assets subtracted by all the liabilities of a fund. It is often shown on a per-share basis. NAV shows the price point at which one share or unit of a fund can be traded. On the other hand, AUM refers to the sum total value of assets a firm is managing under it. Unlike NAV, AUM is not expressed on a per share basis. 

While making investments, it is advisable to focus on the AUM. It inculcates all the assets of a mutual fund as well as the cash held. While NAV is the price per unit of a fund. A bigger AUM signifies a huge client base, increasing trust of the fund. AUM is also a measure of liquidity. A huge AUM acts as a cushion in case there is a bigger redemption, especially in overnight and liquid funds. These funds are usually sensitive to larger redemptions by institutional investors. For such funds, a higher AUM means a good ability to absorb shocks and uncertainties.

Conclusion

AUM is amongst the most critical parameters that define a mutual fund or an asset management company in terms of its strength, stability, and credibility. While it should not be the sole criterion, AUM tells a lot about investor confidence, liquidity of the fund, its performance potential, and the overall standing of the fund house in the market.

A higher AUM generally indicates more confidence in the fund and steady performance, thus allowing flexibility to the fund manager during turbulent periods. It is similarly important to note that a large AUM does not necessarily ensure better returns—particularly in markets such as small-cap or some actively managed strategies where disproportionately large funds may result in deployment issues.

Consequently, investors should look for a balance: AUM in context with, among other key parameters, the track record of the fund manager, expense ratio, investment strategy, historical performance, and risk profile. If appropriately interpreted, AUM can be a dependable tool for assessing the stability and resilience of a particular fund and an informed guide for helping the investor make decisions aligned with long-term financial goals.