The total cumulative investment in a mutual fund can be a great identifier of its performance and potential. In fact, investors have poured significant capital into the Indian mutual fund industry which has led to a five-fold rise in 10 years.
But what is Asset Under Management in mutual funds and why does it matter? If this is the first time you are hearing about it and want to understand AUM in mutual fund meaning, you are in the right place.
What is Asset Under Management in Mutual Funds?
Asset Under Management refers to the overall market value of a mutual fund. Similar to the concept of ‘market capitalization’ of equity shares, AUM tells you how much money every mutual fund manages at any given point in time.
But that’s just one way of looking at AUM. Investors will turn to a particular fund only if it has a decent track record and other key markers like proper management.
That’s why AUM can be a solid indicator of which mutual funds other investors trust.
However, mutual funds are diverse assets that require you to track not just the fund but also the strategy, turnover ratio, expense ratio, and other factors.
Measuring AUM on the fund or industry level is thus another useful importance of the meaning of AUM in mutual funds.
While we’re on the topic, the AUM of mutual funds in India went from Rs 7.60 trillion in December 2012 to Rs 39.89 trillion in December 2022.
This whopping increase indicates that Indian investors are warming up to not only mutual funds but also the share market.
Oh, and by the way, the money that a mutual fund pools from investors is handled by a fund manager and their team of analysts.
The Asset Management Company (AMC) hires the FMs and decides what fund to launch when, each having a particular AUM target.
Read 👉 Top 5 AMCs in India
As a result, the AUM shows the success and size of a particular fund. You can use it as a parameter to compare different schemes of similar sizes to find the one that suits your goals.
AUM value also includes returns earned by the mutual fund scheme. The fund manager may hold it as required, distribute it as a dividend or invest in securities.
Now that you know AUM in mutual fund meaning, let us discuss its impact on mutual funds.
How Does AUM Impact Mutual Funds?
AUM is a key metric to determine the size and financial health of a mutual fund. A higher AUM indicates that the fund is larger and more popular among investors, while a lower AUM suggests that the fund is smaller. With that in mind, here is the impact of AUM on different types of mutual funds.
1. Equity Funds
The returns gained from equity funds depend more on the market than on AUM. While the highest AUM mutual funds rest with equity funds, there have been instances where other types of funds with lower AUM have yielded better returns. AUM has a limited effect on equity funds as it impacts the fund’s value only when an asset rises significantly beyond a point.
2. Debt Funds
Debt funds are most impacted by AUM, as total assets are a critical factor for their success. unds having more capital can reach a large group of investors, thus increasing the potential for returns while decreasing fixed fund expenses for every investor.
Expense Ratio and Asset Under Management in Mutual Funds
The relationship between the expense ratio and AUM in mutual funds is inversely proportional, which means that as AUM increases, the expense ratio likely decreases.
The expense ratio is the amount deducted from total returns earned by a mutual fund as a charge to facilitate the investment and keep the fund afloat.
The Securities and Exchange Board of India (SEBI) regulates the expense ratios of mutual funds in India. The regulator has set limits on the maximum expense ratios that mutual funds can charge, which vary depending on the type of fund.
For example, on the initial AUM of Rs 500 crore, equity funds have a maximum expense ratio of 2.5%, while Debt funds have a maximum expense ratio of 2%. The highest AUM mutual funds are able to spread expenses over a larger pool of assets, which results in a lower expense ratio.
A lower expense ratio can make the fund more attractive to investors as it increases their overall return. It can also increase the fund’s net return, ultimately benefiting investors.
How to Determine the AUM of Mutual Funds?
The calculation of AUM depends solely on fund houses. The current NAV and the total number of units available to investors are used to calculate the AUM.
The nature of AUM is such that it rises when investments made by the fund houses provide consistently positive results over an extended period. There’s logic to this. If a fund performs well consistently, it’s likely to welcome new investors and with them, more capital.
On the other hand, it can also plummet every time the market takes a dip or investors redeem their investments. Think of it as the market cap of a stock that increases/decreases with market fluctuations.
The net change in AUM is usually reflected at the end of the day when the market closes. This is a mandatory disclosure that every fund house and mutual fund is obligated to stick to, regardless of the market conditions.
Conclusion
Asset Under Management in mutual funds is an important factor to consider in a mutual fund. It can help you ascertain the profitability and potential of a particular fund.
However, a fund’s performance also depends on several other factors including market conditions and the experience of asset managers. Thus, while AUM is a good pointer, it should not be your sole consideration while buying mutual funds.
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