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In summary
Assets under management
Assets Under Management, or AUM, tells you the total value of assets managed by a mutual fund scheme at a particular point in time. It can increase or decrease as investors add or withdraw money and as the market value of the scheme's investments changes. AUM is useful for understanding the size of a mutual fund, but it does not tell you whether the fund will deliver better returns.
The key points to remember are:
- AUM stands for Assets Under Management.
- It represents the total value of assets managed by a mutual fund scheme.
- AUM can change because of fresh investments, redemptions and market movements.
- A simple illustration of AUM can use NAV multiplied by the number of outstanding units.
- AUM and NAV are different. AUM refers to the total value of assets, while NAV is the value per unit.
- A higher AUM does not automatically mean that a mutual fund is better or will provide higher returns.
You should consider AUM along with factors such as the fund's objective, risk level, costs and investment strategy.
Understanding AUM can help you read mutual fund information and compare schemes more confidently.
What is Assets Under Management (AUM)?
Assets Under Management (AUM) is the total market value of the investments managed by a financial entity, fund or individual on behalf of clients. For a mutual fund, this includes the value of the assets held by the scheme.
These assets can include shares, bonds, government securities, cash and money market instruments, depending on the scheme's investment objective.
For example, if a mutual fund manages assets worth Rs. 500 crore, its AUM is Rs. 500 crore at that point in time. The figure can change as investors invest or redeem units and as the value of the investments changes.
You can learn more about mutual funds to understand how these investment products work.
AUM is also used in other areas of financial services, such as hedge funds and wealth management. However, the way AUM is calculated and reported can vary depending on the type of financial entity.
Why is AUM important?
AUM helps you understand the size of a mutual fund scheme or investment entity. It can also help you understand how the size of a scheme changes over time.
However, AUM should not be treated as a direct measure of fund performance, safety or future returns.
For example, a scheme with AUM of Rs. 10,000 crore is larger than a scheme with AUM of Rs. 1,000 crore. This tells you about the size of the two schemes, but it does not tell you which one will perform better.
You can use AUM as one factor while studying a mutual fund, along with its investment objective, risk level, portfolio, costs and performance.
How to calculate Assets Under Management?
AUM represents the value of the assets managed by a fund. The value can change when investors buy or redeem units and when the market value of the securities held by the scheme changes.
For a simple mutual fund illustration, you can understand the relationship between AUM and Net Asset Value using the following example.
H3: A simple AUM calculation
Suppose a mutual fund has a NAV of Rs. 20 and 20,000 outstanding units.
For this simple illustration:
AUM = NAV × Total number of outstanding units
= Rs. 20 × 20,000
= Rs. 4,00,000
This gives an asset value of Rs. 4,00,000 for the units in the example.
In practice, a mutual fund scheme's assets and liabilities are valued according to the applicable rules. The reported AUM can therefore change with market movements and investor transactions.
Why does AUM change?
AUM is not a fixed number. It can change even when the number of investors remains the same.
The main reasons include:
- Fresh investments: When investors add money to a scheme, its assets can increase.
- Redemptions: When investors withdraw money by redeeming units, the scheme's assets can decrease.
- Rise in asset values: If the market value of the securities held by the scheme increases, AUM can rise.
- Fall in asset values: If the market value of the securities decreases, AUM can fall.
For example, a scheme may have AUM of Rs. 4 crore. If investors add Rs. 50 lakh, its AUM can increase to Rs. 4.5 crore, assuming there are no other changes. A subsequent rise or fall in the value of its investments can change the figure further.
AUM and expense ratio
AUM and the expense ratio are related, but a higher AUM does not automatically mean a lower actual expense ratio.
The expense ratio is the cost charged by a mutual fund for managing and operating the scheme. It is expressed as a percentage of the fund's assets.
SEBI prescribes limits for the Total Expense Ratio based on applicable asset-size slabs and the type of scheme.
This means the relationship between AUM and permissible expenses is regulated. However, you should not assume that:
Higher AUM = lower actual expense ratio
When comparing mutual funds, check the actual expense ratio of each scheme along with other relevant factors.
Does high AUM mean a better mutual fund?
No. A high AUM does not automatically mean that a mutual fund is better or will deliver higher returns.
A high AUM mainly tells you that the scheme manages a larger pool of assets. It may also mean that many investors have invested in the scheme, but this alone does not tell you why they invested or whether the scheme is suitable for you.
Similarly, a smaller AUM does not automatically mean that a fund is poorly managed.
When comparing funds, consider factors such as:
- The fund's investment objective
- Its portfolio
- Its risk level
- Its expense ratio
- Its performance over relevant periods
Its investment strategy
Your choice should also match your financial goals and risk appetite.
AUM vs NAV: what is the difference?
AUM and NAV are related but have different meanings.
AUM refers to the total value of assets managed by a mutual fund scheme. NAV, or Net Asset Value, refers to the value of one unit of the scheme after accounting for the scheme's assets and liabilities.
The basic difference is shown below:
| Term | Meaning |
|---|---|
| AUM | Total value of assets managed by a mutual fund scheme |
| NAV | Value of one unit of the mutual fund scheme |
For example, a scheme may have AUM of Rs. 100 crore while its NAV is Rs. 25 per unit. These figures measure different things.
NAV can change when the value of the securities held by the scheme changes. AUM can also change because of investor inflows and redemptions.
Does AUM affect how a mutual fund is managed?
AUM tells you the size of the assets being managed. It does not tell you how well those assets are managed.
A fund manager manages the scheme according to its investment objective and strategy.
The size of a scheme can matter in some situations. For example, a very large scheme may need to consider the availability and liquidity of securities when making large transactions. The effect depends on the scheme and the assets in its portfolio.
A smaller AUM does not automatically mean poor management. Similarly, a larger AUM does not guarantee better performance.
How should you use AUM when comparing mutual funds?
AUM can help you understand the size of a mutual fund scheme. It can be one of the factors you consider when comparing funds, but it should not be the only one.
Suppose you are comparing two equity mutual funds. One has AUM of Rs. 10,000 crore and another has AUM of Rs. 1,000 crore. The first scheme is larger in terms of assets managed, but this information alone does not tell you which fund is more suitable.
You should also consider the funds' objectives, risk levels, portfolios, costs and relevant performance information.
AUM as a measure of fund size
AUM is often used to describe the size of a mutual fund scheme or financial institution.
A larger AUM means a larger value of assets is being managed. However, size should not be confused with performance.
A fund can have a large AUM and still deliver lower returns than another fund. Similarly, a smaller fund can perform well.
Therefore, AUM is best understood as a size-related measure, rather than a score for judging a fund.
AUM and investment management strategy
AUM can be relevant when understanding how a fund manages its assets, but it is not a measure of the quality of the investment strategy.
For example, the size of a scheme can affect how it manages large transactions, particularly when it invests in securities with lower liquidity.
However, a large AUM does not automatically mean that a fund has better research, more experienced managers or better investment decisions.
You should assess the fund based on its investment objective, strategy, portfolio, costs and other relevant information.
AUM across different types of financial entities
AUM is used in several areas of financial services. These include mutual funds, hedge funds, wealth management and private equity.
The meaning and calculation can differ depending on the type of financial entity.
For a mutual fund, AUM generally refers to the value of the assets managed by the scheme. In other financial businesses, AUM may be based on different assets, valuation methods or reporting practices.
For this reason, always consider the context when you see an AUM figure.
What are the limitations of AUM?
AUM is useful for understanding fund size, but it has limitations.
The main limitations are:
- AUM does not predict future returns.
- AUM does not tell you whether a fund suits your financial goals.
- AUM can rise because of market movements even when investors have not added new money.
- AUM can fall because of market declines even when investors have not redeemed their units.
- A high AUM does not guarantee lower risk.
A low AUM does not automatically indicate poor fund management.
Therefore, AUM should be treated as one piece of information rather than a measure of fund quality.
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Frequently Asked Questions
Understanding AUM
Can AUM fall even when investors do not withdraw money?
Yes. AUM can fall when the market value of the securities held by a mutual fund decreases. For example, if a scheme owns shares and their market prices decline, the value of the scheme's assets can fall even if no investor redeems units. AUM can therefore change because of both investor transactions and market movements.
Does AUM include the value of securities held by a mutual fund?
Yes. A mutual fund's AUM reflects the value of the assets managed by the scheme. Depending on the scheme, these assets can include equities, bonds, government securities and money market instruments. The value of these investments can change with market conditions, which can cause the scheme's AUM to rise or fall.
Is AUM the same for every mutual fund scheme?
No. Each mutual fund scheme has its own AUM based on the value of the assets it manages. Two schemes can have very different AUM figures even if they belong to the same category. AUM can also change over time because of investor transactions and changes in the market value of the investments.
Should you choose a mutual fund based on AUM?
No. AUM should not be the only factor you use when selecting a mutual fund. It tells you about the size of the scheme but does not predict future returns or tell you whether the fund suits your goals. You should also consider the fund's objective, risk level, portfolio, costs and relevant performance information.
Disclaimer
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