Let’s say you invest in a mutual fund. Similarly, there would be other investors who have put their money into the same mutual fund as well. When we add up the money invested in a mutual fund by all investors, the value we arrive at is the assets under management (AUM) of the mutual fund. In short, it’s the aggregate market value of investments or assets that a mutual fund holds.
Asset Under Management in detail
AUM is an indicator of the size and success of a fund house by comparing how its assets under management in various timelines and market phases performed as opposed to the AMC’s competitors. The AUM of a mutual fund also comprises the returns earned by the fund. This money is used by the fund manager to invest in securities as per the mutual fund’s investment mandate.
Assets under management are subject to market fluctuations. The fund’s AUM will rise when it earns returns and fall when it incurs losses. They rise with positive fund performance and vice versa. This also determines the fund fees. Lesser AUM generally means lower fees.
For example, if 100 investors have cumulatively invested ₹10,000 in a mutual fund that has earned 10% returns, then the fund’s AUM would be ₹11,000. Overall, a fund’s AUM is affected by the acquisition or redemption of fresh investments and rise or fall in the performance of investments that make up the portfolio. This said and done, companies use different methods to calculate AUMs.
Should AUM be a factor while choosing a fund?
Mutual fund investors often look at the fund’s AUM and get impressed if the AUM is on the higher side. This is human tendency. Don’t we all tend to like something that others have used before us? A fund with a high AUM is generally a popular fund. People think that if so many investors have already invested in the fund, then it must be a good one. However, AUM should not be a deciding factor while choosing a fund.
A higher AUM does not always mean a better fund. What investors should look at while selecting a fund is its long-term performance across different time periods. Other factors to consider are the fund’s expense ratio, consistency in following its investment mandate and fund management team.
Example – Mirae Asset India Opportunities and HDFC Top 200 are two large-cap equity funds. The former has an AUM of just ₹4738 crores while the latter a popular equity fund with an AUM of ₹14,655 crores. Most investors would look at the higher AUM and invest in HDFC Top 200. However, the Mirae Asset fund has historically earned higher returns over various time periods.
|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%|
As the table shows, if the fund selection had been solely AUM-based, the investor would have earned lesser returns.
Effect of high AUM on a mutual fund
It can sometimes be the case that an equity fund’s bloating AUM can have an adverse effect on its performance. The fund manager should be able to grasp opportunities in the market and enter or exit a stock at the most opportune time. A high AUM can be a hinderance for the fund manager to take quick investment calls. But even in such a case, the AUM should not be a factor in not choosing a fund. If the fund is not able to take the right investment decisions because of its high AUM, the same will reflect in its returns.
In a nutshell, while the AUM is important in assessing a fund’s popularity and performance, it should not be an important factor in choosing to invest or not in a mutual fund.
Every fund manager levies a remuneration proportional to the fund size – which is the AUM fee or the management fee. It is normally a flat rate charged to the whole fund and billed to investors based on the number of units they hold. The fund performance has not impact on the fees – it covers admin expenses and determines the manager’s compensation for his efforts.
Total Expense Ratio (TER) is expenditures incurred on the mutual fund annually. As per the SEBI rules, AUM must always be higher than TER. The fund house may impose an extra 30 bps of TER, if the credit inflows from the unlisted 15 cities reach up to at least 15% of the mutual fund’s AUM.