The total market value of the securities that a financial institution holds or manages on behalf of its customers is referred to as the institution's assets under management (AUM).
Take, for instance, the case of a mutual fund that maintains considerable cash reserves in addition to a diversified portfolio consisting of equities and bonds. Let's say that the portfolio of the mutual fund includes INR 2,000,000 in cash, INR 4,500,000 in government bonds, INR 1,500,000 in corporate bonds, and 2,000,000 in stocks. The total value of the portfolio would be 8,000,000. Adding this to the cash of INR 2,000,000, we will get an AUM of INR 10,000,000.
AUM in mutual funds represents the total market value of all investments managed by a fund or family of funds, a venture capital firm, a brokerage firm, or a registered investment advisor or portfolio manager.
What is AUM in mutual fund?
Assets under management refer to the money that the mutual fund company manages on behalf of its customers/investors. If an investor has put INR 1,00,000 into a mutual fund, for instance, the money is considered part of the overall AUM for the fund. After this, the fund managers will be able to buy and sell shares in accordance with the investment objective of the fund utilising all of the monies that have been invested, which will result in capital appreciation.
In most circumstances, AUM in mutual funds indicates its overall success. Stronger performance means more assets under management, but investors shouldn't rely simply on this indicator.
When AUM is larger, the fund manager can make more challenging entrance and leave decisions. Fund management fees are usually a proportion of total assets. AUM changes regularly, reflecting the influx and ebb of resources from organisations in which fund houses invest. More assets make funds more liquid.
Significance of AUM in different funds
The amount of assets under management is less essential than the consistency of returns and the degree to which the fund house complies with the investment aim. The success of an equity fund is determined not by its size or level of popularity, but rather by the asset manager's capacity to continuously generate good returns.
If you are interested in investing in debt funds, AUM is an essential factor to take into consideration. In a debt fund that has more cash available, the expenses of the fixed fund can be distributed across a greater number of investors. As a consequence of this, the expenditure ratio that applies to each individual can be lowered, which ultimately results in higher fund returns.
Significance of AUM in Large, Medium and Small-cap Funds
A comparatively significant number of large-cap funds are available to investors. Even while large-cap funds only cover 100 companies, the 100 businesses that they do cover have a significant amount of liquidity. As a direct consequence of this, a large-cap fund might manage a significant AUM.
When compared to that of large-cap funds, the AUM capacity of mid-cap funds is significantly lower. Midcap companies often fall in the range of 101 to 250 in terms of their market capitalization.
Small-cap funds have a tendency to restrict cash inflows beyond a given point in time. When the market is volatile, the fund may have a difficult time trading its shares if it becomes a significant stakeholder in a company. Because of this, small-cap funds favour investing through SIPs rather than making one large investment at a time.
What kind of an effect does AUM have on the fees that mutual funds charge?
The cost that each mutual fund company charges for its services is commonly referred to as the expense ratio. The management fees, as well as the operational costs, are included in the expense ratio. These are dependent on the total amount of the fund. AUM is a crucial component that plays a role in the overall computation of the management fees that are associated with a mutual fund. Because the expense ratio or the fees of a mutual fund are computed as a percentage of AUM, a mutual fund with a larger AUM will have higher costs, whereas a mutual fund with a smaller AUM will have lower fees.
The Securities and Exchange Board of India has established a maximum allowable expense ratio for mutual funds, and it is based on the amount of assets under management (AUM).
How is AUM in Mutual Fund calculated?
The total value of an asset under management (AUM) in a mutual fund is a measurement of the size of a financial institution as well as a significant performance indicator of success. This is due to the fact that a greater AUM often translates into larger revenue in the form of management fees. Because of this, financial institutions evaluate business trends by looking at the value of their AUM and comparing it to that of their competitors as well as to their own past performance.
Fund providers use a number of methodologies to arrive at their estimates of the value of the assets under management. When a fund consistently achieves high levels of profitability, the value of its total holdings will gradually rise. A bigger amount of assets under management (AUM) might be the consequence of successful efforts attracting additional investors and assets.
Calculating assets under management can seem a little bit different depending on whether you ask an institution or an investor. In their computations, some banks may incorporate mutual funds in addition to deposits and cash on hand. Other institutions simply take into account the funds that are subject to discretionary management and that the institution has the ability to utilize to trade on the clients' behalf.
AUM and Market movements
Alterations in the market have a substantial impact on the assets that are under control. When the fund has positive earnings, its total assets will increase, but when it has negative earnings, those assets will decrease. The current state of the market has an effect on the total value of assets that are managed by mutual funds. The returns will be higher while the market is rising, but they will be lower when the market is falling. When the market is falling, it will incur losses. The value of an asset increases and falls in tandem with the ups and downs of the market. The change in the value of the asset is recast as the change in the amount of the asset that is managed by the management companies. This is also what sets the charge for investing in a mutual fund. In most cases, reduced costs correspond to lower values.
For example, 20 investors have contributed a total amount of INR 50,000 to a mutual fund scheme. The return on investment for participating in the mutual fund program is 12%. In this scenario, the asset that is being managed for the mutual fund program will be INR 56,000.
On the other hand, suppose the rate of return earned by the mutual fund plan is 1%. The amount of INR 50,500 would be used as the AUM for the mutual fund plan.
In a Nutshell
AUM is an excellent instrument that can be used to gauge the level of success and popularity of a fund. If comparing these data appears to be difficult, you can always invest with 5Paisa. We have chosen the best-performing portfolios to meet a wide range of investment demands.