AUM or Asset Under Management – Concept, Examples, Importance, Calculation & moreLast Updated Date: Nov 16, 2022
In this post, we’ve summed up all the information thoroughly regarding AUM or Asset under Management.
But before we talk about Asset Under Management, let’s understand Mutual Funds to make things easier.
Before you tap into the financial market, it’s always best to first note down a few essential points in your checklist.
It’s easy to lose money within a second but takes years of hard effort to get back to the same financial position.
Hence, every step decides the next phase of your journey. Owing to this, most people opt investment in a mutual fund because it is less risky as compared to others.
But it isn’t the whole truth as it comes at a significant risk too. Suppose you’re planning to enter in mutual funds.
Hence, your financial experts might have advised you to check out the AUM. So what it is? Why should you consider it an important thing?
And how does it impact Mutual Funds performance?
What is AUM or Asset Under Management in Mutual Funds?
If you’ve got a clear insight into what is Mutual Funds, then understanding AUM or Asset Under Management doesn’t remain that much tricky thing.
As the name sounds, AUM is the name of that process in which a mutual fund manager manages the entire funds collected from investors.
Similarly, managers invest on behalf of individual investors across the varying market. Though, it can frequently change as the flow of funds can fluctuate over time.
Moreover, it doesn’t refer to as managing a pool of funds for a single scheme. The schemes can vary.
For instance, a particular fund category of Mutual Fund Scheme has Asset Under Management of a few hundred crores.
But there can be a popular fund following the same category that may require AUM of thousands of crores.
Hence, it can be different between two mutual funds schemes.
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Example of AUM for a Mutual Fund
Let’s understand in-depth about Mutual Funds through an example. A fund manager diversifies the portfolio containing cash, stocks and bonds.
Similarly, a mutual fund’s portfolio now includes Rs. 1 crore in stocks, Rs. 2 crores in government bonds and Rs. 2 crores in corporate bonds and Rs. 1 crore in cash.
Hence, the total value of AUM will be Rs. 6 Crore.
Should I consider AUM before Investing in Mutual Funds?
Of course, you should consider AUM before you start investing in Mutual Funds. However, you shouldn’t miss anything that highlights all the information related to a Mutual Fund scheme.
Identifying the size can help you out in getting an idea about the scheme and fund managers.
How well is the MF company working in the market? You can get a full-fledged insight about it on a big picture.
The higher the AUM is, the more reliable is the AMC (Asset Management Scheme). It highlights the successful image of the scheme, and more investors are likely to join it.
Though, it doesn’t mean at all that any MF scheme is more likely to deliver you higher return if it has higher Asset Under Management.
A mutual fund scheme that has a lower AUM can surprisingly offer you great returns. On the other hand, schemes with a higher Asset Under Management might not live up to your expectations.
That’s why your choice depends solely on which asset you choose.
AUM and Equity Fund Importance
If you are willing to invest in equity funds, you can pick the scheme with lower AUMs.
It can unexpectedly perform much better as compared to other schemes with higher Asset Under Management.
Owing to this, it becomes vital for an investor not to change his decision on the base of someone’s suggestion. He/she can be wrong.
It’s necessary to consider a mutual fund scheme by fully relying on the AUMS. Though, other factors such as returns consistency, fund house and credibility of the fund managers must be taken into account.
The expense ratio is another critical factor you must pay attention to.
AUM and Debt Fund Importance
If you are planning to invest in Debt Funds, you can choose the option with a higher Asset Under Management.
For instance,- fund managers distribute fixed expenses to reduce the fund ratio across investors. It highlights a better AUM of a scheme.
But it can also trigger the risk of redemption if debt fund’s AUM becomes too large. Though, it’s more likely to happen during volatile market conditions.
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How to Calculate AUM of a Mutual Fund Scheme?
The above discussion sets out how important it is to calculate the AUM if you’re investing in Mutual Fund.
Now, we’ll talk over the varying methods of calculating AUM in a particular Mutual Fund scheme.
In a nutshell, it proliferates over time if an investment is consistently delivering higher returns to the traders.
However, it also makes a logical sense as more investors are likely to invest their money in such asset classes offering higher returns. It attracts new investors too.
But, the Asset Under Management can also fall if the Mutual Fund scheme fails to outperform. It can indicate a drop in the investors’ income.
In most instances, investors with an existing plan can lose their entire money.
How AUM Impacts Mutual Fund Schemes?
Even though you invest in a mutual fund scheme with a higher AUM or a lower one, there’s no specific rule that it can affect the scheme’s performance.
In a nutshell, a particular stock with a higher Asset Under Management makes it problematic for a manager to enter or exit from the stock market as quickly as essential.
On the other hand, a stock with a lower AUM enables a manager to enter or exit the market effectively. It raises the chances for traders to reap the benefits of hot opportunities booming in the market.
Though, lower AUM comes with higher flexibility. In most instances, stocks with a lower AUM don’t have adequate funds required to take the benefits of booming opportunities in the market.
So what does it says? All these things provide a full-fledged idea to the investor that deciding on the base of higher and lower AUM doesn’t make a smart sense.
It doesn’t prove it that the associated scheme is more likely to derive profitable results. In addition to it, you can draw a list of the best Mutual Fund Schemes.
You’ll see that few of these investments don’t have a direct relationship with AUM. Still, they are deriving higher returns.
How an Asset Under Management changes over time?
Some significant factors can affect the AUM position over time; some of them are as follows:
Inflows and Outflows of Funds
It can significantly impact the performance of a portfolio when Investors withdraw or deposit money in a mutual fund in an extensive amount.
It can hit changes in AUM as the investment grows large or squeeze over time.
The number of Dividends Paid
The number of dividends can also bring some significant changes in AUM. In most instances, the paid dividends by a company are reinvested, which was suppose to be distributed.
In such cases, the effect on AUM is usual.
The Securities Value in which AUM is invested
Suppose the value of securities increase or decrease over time. It’ll lead to a significant change in a mutual fund, such as it can bring a drop or incline in a mutual fund’s performance.
All such factors can pose a change in Asset Under Management. However, a fund having inflows and outflows frequently tends to make AUM with higher volatility.
On the other hand, funds with a stable investor’s base are likely to come under less volatility condition.
Though, the fund can experience fluctuations in AUM at a higher degree if invested in volatile securities. For this, you can choose less-volatile securities where the AUM is more stable.
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AUM or Asset Under Management – Conclusion
In this entire post, now you’ve obtained a comprehensive insight into how AUM can influence a Mutual Fund Scheme.
Though, as a smart trader, you shouldn’t move ahead with an investment decision by solely relying on the AUM. You must put additional knowledge and calculation into practice.
Only then, you can come across the right decision. In most instances, lower Asset Under Management can be a sign of possibilities of a higher return.
Higher AUM can lead to a confusing situation for investors. That’s why, before you get into a mutual fund scheme directly, ask for expert advice.
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