Importance of AUM: Should it be a deciding factor for mutual fund investments?
Among the several factors that come into play while investing in mutual funds, the Assets Under Management (AUM) is either paid too much attention to, or considered not important at all. Knowing how the AUM affects investments would make you a wiser investor.
In this article, we will discuss what AUM is, and whether or not you need to take it into consideration while making investments.
AUM or Assets Under Management is the total market value of all the assets that a mutual fund manages. In other words, it refers to the total amount of capital which the mutual fund actually holds and is being managed by a professional fund manager who is responsible for making crucial investment decisions on behalf of the investors.
AUM provides an indication of the success of a fund house in comparison with others. It also goes a long way to help investors know if returns on investment will be sizable or if the fund is stable.
The relevance of AUM depends on the type of mutual fund you intend to invest in. Here is how AUM influences these types of funds:
In the case of equity mutual funds, AUM may not be so crucial. Instead, it is the frequency and consistency with which returns are generated over time along with its performance in market fluctuation. Consistency is the aspect in these cases, not the size of the fund. Hence, even if an equity fund has low AUM, it does not matter. If positive returns are generated with consistent regularity, the fund is a good performer.
AUM is of importance when it comes to debt mutual funds. A larger AUM means that the fund can spread fixed expenses to a wider investor base, which results in the expense ratio being smaller for every investor. As a result, it often translates into better returns. Also, a high AUM will enable the fund house to negotiate better terms with debt issuers and may even lead to increased profitability.
AUM does have an impact on mid and small-cap funds. Small-cap funds invest in companies that have a high growth potential, but are in the growth phase. Buying and selling shares in such small companies could be a challenge, and also impacts liquidity. These funds tend to restrict cash influx after a certain point, which leads to the AUM for the fund to rise beyond a particular mark. In such cases, the fund managers are faced with challenges in terms of investing large sums in the underlying stocks, wherein the associated restrictions makes it difficult to navigate the path.
Mid-cap companies, on the other hand, come with more liquidity, and a larger AUM can be accommodated by fund managers.
A common misconception is that larger funds perform better. The size of the fund has nothing to do with the returns. Most large-cap funds perform irrespective of their AUM. Higher AUMs can be managed by these funds without much affecting their performance. As an investor, you must take into account other performance parameters.
There is no universal rule that defines the relationship between a mutual fund and its AUM. Most mutual fund schemes react to higher AUMs differently. A good fund manager will still be able to generate profits irrespective of the AUM level, considering market fluctuations.
The Assets Under Management of a mutual fund will give insight into what the market capitalisation of the fund is, but it should not determine your investment decisions. You should be able to make well-informed decisions that would align with your financial goals.
The Bajaj Finserv Mutual Fund Platform is an excellent place to look at over 1,000 mutual funds, and compare mutual funds by using a mutual fund calculator. The platform’s user-friendly interface allows you to compare fund returns, and choose the best options available.
Not necessarily. A high AUM could be seen as an indicator of the popularity of the fund, though it does not necessarily indicate better performance. What is more important are factors such as the expertise of the fund manager and the kind of investment strategy that the manager uses.
No, a smaller AUM is not always bad news. Sometimes, funds with small AUMs give out really good returns, especially funds that have a consistent record.
No, AUM is one of several considerations. Remember that the most important areas to consider are the performance, the level of risks managed, the consistency, and the expertise of the fund manager.
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