1. Assets Under Management
Assets under management are the overall market value of assets/capital that a mutual fund holds. The fund manager manages these assets and makes all investment-related decisions on behalf of the investors. AUM is an indicator of the size and success of a given fund house.
You can easily compare a fund’s assets under management in various timelines and performance with other similar schemes. The AUM-value also includes the returns that a mutual fund earns. The asset manager can invest this in securities, distribute to investors as dividends, or hold as per the investment mandate.
2. Should you consider AUM before investing?
Mutual fund investors often look at the fund’s AUM and get impressed if it is on the higher side. People think that if so many investors have already invested in the fund, then it must be a good one. However, there are many reasons why this number should not be a significant factor while choosing a fund. The expense ratio, reputation of the fund manager, and compliance with investment mandate are some of the most important factors to consider.
Let’s dissect the importance of AUM concerning different fund types.
a. Equity funds
Here, consistency in returns and compliance of the fund house with the investment mandate matters more than AUM. By consistency, we mean beating the benchmark throughout the market highs and lows. Hence, an equity fund runs on the asset manager’s skill to generate good returns consistently rather than popularity or size.
b. Debt funds
AUM is a crucial factor to consider if you are planning to invest in debt funds. A debt fund with more capital under it can spread the fixed fund expenses across the number of investors. This can reduce the expense ratio per person and hence increase the fund returns. More assets under the fund also help the fund company to negotiate reasonable rates with debt issuers.
c. Small-cap funds
Small-cap funds tend to restrict cash influx after a certain point. DSP BlackRock Micro Cap Fund is a widely known example for this. This usually occurs when the assets under mutual fund grow beyond a point. If the fund becomes a significant shareholder in a company, it may not be able to trade its shares easily when the market fluctuates. This is why a small-cap fund often avoids lump sum investments and stick to SIPs.
d. Large-cap funds
Let us dissect how AUM impacts large-cap mutual funds through an example. Mirae Asset India Opportunities and HDFC Top 200 are two large-cap equity funds. The former has an AUM of just Rs.4,738 crore, while the latter’s is Rs.14,655 crore. Most investors may choose to invest in HDFC Top 200 for this reason. However, the Mirae has historically earned higher returns over various periods as the table below shows.
|Fund name||1-year returns||3-year returns||5-year returns|
|Mirae Asset India Opportunities||21.35%||16.54%||20.81%|
|HDFC Top 200||15.90%||10.55%||15.13%|
3. Impact of high AUM on mutual funds
Sometimes, an equity fund’s bloating AUM can affect its performance negatively. Nevertheless, there is practically no evidence to indicate that a higher AUM affects the fund performance adversely or aids it. It is the fund manager who should grasp the market opportunities – enter or exit a stock at the ‘right’ time. In many cases, a larger asset-under-management has hindered the manager in taking quick investment-related decisions. Consider the performance of the fund you invested in against the benchmark and its competitors before investing.
4. How to calculate AUM
Fund houses employ different methods to calculate assets under management. The overall investment in a fund will rise when it gives consistently positive returns. A positive performance can attract new assets and more investors, leading to an increased AUM. Similarly, if there is a dip in the market value or the investment performance, it can decrease the assets. Same goes for unexpected closure of the fund or every time an investor redeems his/her share. Assets under management entail capital invested throughout the company’s products – this includes the shares of the company executives as well.
5. Effect of AUM on expense ratio or fee
Every fund house levies a fee proportional to the fund size – which is the management fee. It is a flat rate to the whole fund; they charge investors based on the number of units they hold. The fund performance has no direct impact on the fees. It merely covers the admin charges and determines the asset manager’s compensation for his efforts. Total Expense Ratio (TER) is the annual costs to operate a mutual fund. SEBI mandates the AUM to be always higher than TER.
6. AUM and market movements
Market fluctuations impact the assets under management considerably. The fund’s assets will rise when it earns returns and fall when it incurs losses. This also determines the mutual fund fee. Lesser value generally means lower costs. For instance, say, 100 investors have cumulatively invested Rs.10,000 in a mutual fund that has earned 10% returns. Then the fund’s AUM would be Rs.11,000. This said and done, and companies use different methods to calculate the value of assets they manage.
In a nutshell, AUM is an excellent way to assess a fund’s popularity and performance. But it shouldn’t affect your decision to invest or not. If comparing these metrics seems complicated, you can always invest with ClearTax. We have selected the best-performing portfolios to cater to diverse investment needs.