What is AUM in mutual fund

Home

Services

Products

Help

Get App

Assets Under Management (AUM) is a crucial metric in the financial industry, particularly in mutual funds. AUM refers to the total market value of the assets that a financial institution or investment company manages on behalf of its clients. These assets can include stocks, bonds and other financial investments.

AUM is an essential measure of the size and success of a mutual fund, as it provides investors with insight into the fund's popularity and credibility. It also indicates the financial institution's expertise and ability to attract and retain clients. Additionally, investors often use AUM to assess the fund's liquidity and stability. The larger the AUM, the more resources and diversification potential the fund may have, which can attract investors seeking long-term growth and stability.

Importance of AUM in Mutual Funds

Understanding the importance of Assets Under Management (AUM) is crucial in mutual funds. AUM refers to the total value of the assets that a financial institution or investment company manages on behalf of its clients. It serves as a key metric for evaluating the size and success of a mutual fund.

Investors often consider AUM a measure of the fund's popularity and credibility, as a higher AUM can indicate greater trust from investors. Further, AUM provides insights into the financial institution's expertise and ability to attract and retain clients. A larger AUM can also suggest a fund's potential for diversification and stability, which can appeal to investors seeking long-term growth.

Calculating AUM

The Assets Under Management (AUM) can be calculated using the formula:

AUM=Market Value of Investments Held+Cash and Cash Equivalents−Liabilities

This formula aggregates the total market value of all the financial assets managed on behalf of clients, plus any cash or cash equivalents, and subtracts any liabilities owed.

Factors Influencing AUM

Factor	Explanation
Market Performance	The performance of the markets in which the assets are invested can cause AUM to rise or fall significantly.
Investor Flows	Net inflows (investments) and outflows (withdrawals) directly impact AUM.
Fund Performance	The performance of the fund itself, independent of market trends, affects AUM through gains or losses.
Fee Structure	Management and performance fees can affect AUM, as they are often deducted from the managed assets.

AUM and Expense Ratio

The expense ratio is crucial for investors to consider when evaluating mutual funds. It represents the percentage of a fund's assets that cover expenses, such as management fees, administrative costs, and marketing expenses.

A lower expense ratio is preferred as it implies that a larger portion of the fund's returns will be passed on to investors. The relationship between AUM and the expense ratio is significant. As a mutual fund's assets under management (AUM) increase, the expense ratio tends to decrease due to economies of scale. This is because the fixed costs associated with managing the fund can be spread over a larger asset base. For investors, a lower expense ratio can lead to higher potential returns over the long term.

Thoroughly analyse the expense ratio of a mutual fund before making any investment decisions, as it directly impacts the overall performance and profitability of the investment.

Difference Between AUM and NAV

Net Asset Value (NAV) represents the fund's per-share/unit value on a specific date or time. It is calculated by dividing the total value of all the securities in the portfolio, minus any liabilities, by the number of fund shares outstanding.

Contrasting AUM and NAV

Aspect	AUM	NAV
Definition	Total market value of managed assets and cash.	Value per share of a fund, calculated daily.
Calculation	Sum of all assets managed, minus liabilities.	Total asset value minus liabilities, divided by units.
Purpose	Measures the size and scale of fund management.	Determines the buying and selling price of fund units.
Influence	Affected by market performance and cash flows.	Influenced by the performance of underlying investments.

How is AUM Used as a Tool by Investment Companies?

Investment companies utilise AUM as a crucial tool in their decision-making processes. The AUM metric not only measures a fund's size and growth potential but also plays a pivotal role in guiding investment strategies.

Investment companies often set targets for AUM growth as it directly affects their profitability and market positioning. Higher AUM allows for economies of scale, enabling companies to negotiate better fee structures and attract more investors. Investment companies employ various strategies to increase AUM, such as expanding their product offerings, targeting new markets, implementing effective marketing campaigns, and delivering strong investment performance.

Impact of High AUM on Mutual Funds

High Assets Under Management can have advantages and disadvantages for mutual funds. On the positive side, a high AUM signifies trust and confidence from investors, reinforcing the fund's reputation and market standing.

It also allows for economies of scale, enabling the fund to negotiate lower expenses, ultimately resulting in higher investor returns. Additionally, a large AUM gives the fund access to a broader range of investment opportunities and diversification strategies.

However, there are also challenges associated with managing a high AUM. As the fund grows, it becomes more difficult to achieve the same level of performance as when it was smaller. The fund may face liquidity constraints, making it harder to swiftly enter or exit positions without impacting prices.

What is the Benefit of a Fund with a Large AUM?

Investing in a mutual fund with a large AUM (Assets Under Management) can offer several benefits for investors. Firstly, a fund with a substantial AUM often indicates a track record of success and investor confidence. This can provide security and trust in the fund's ability to manage and grow investments effectively. A larger AUM allows the fund to take advantage of economies of scale.

The fund can negotiate lower fees and expenses with more assets, ultimately leading to higher investor returns. Moreover, a fund with a large AUM can provide access to a wider range of investment opportunities and diversification strategies. This can help mitigate risks and potentially enhance portfolio performance. However, investors must consider certain factors when selecting a fund based on AUM.

Frequently Asked Questions

Q: What is AUM In Mutual Fund?

A: AUM, or Assets Under Management, refers to a mutual fund's total market value of investments. It indicates the fund's size and performance.

Q: How do you calculate AUM in a mutual fund?

A: AUM is calculated by summing up the market value of all securities, such as stocks, bonds, and other assets, that a mutual fund holds.

Q: How to Increase Mutual Fund AUM?

A: Mutual Fund AUM can be increased with positive fund performance, new customer inflow, or additional investments from existing customers.

Q: Does AUM affect NAV?

A: AUM does not directly affect the Net Asset Value (NAV). However, a larger AUM may suggest greater resources for investment, potentially impacting fund performance and, thereby, the NAV.