AUM (Assets Under Management): Meaning, Calculation, Formula

AUM is a critical metric to evaluate the growth and success of mutual funds. A mutual fund is a collection of contributions from various investors and financial institutions that follow an investment methodology, such as investing in specific segments or industries or having a diverse portfolio across the market caps. AUM essentially signifies the combined market value of all assets, like bonds, cash, stocks, etc., held by fund managers on behalf of clients.

To know all about AUM meaning and how it is calculated, let's have a look at this guide in detail.

What is an Asset Under Management?

In mutual funds, the AUM full form is Assets Under Management. It indicates the total market value of all assets, including stocks, bonds, and other securities. Mutual funds pool money from many investors and financial institutions to build a diversified portfolio of assets under the management of professional fund managers. An AUM in mutual funds reflects the fund size of assets under the portfolio and is used to measure the fund's popularity, success, and profitability.

How is AUM Calculated in Mutual Funds?

The calculation of AUM depends on fund houses. They use different ways to calculate AUM in mutual funds, keeping their objective aligned. AUM is a function of three variables, i.e., inflows, outflows, and market price.

Net flows are calculated when inflows and outflows happen. Positive net flows indicate a rise in assets (though not always). An increase in the market price of underlying assets may also result in a rise in AUM (however, not always).

The net change in the value of AUM is reflected at the end of trading when the market closes for the day. AUM will increase with positive net flows and decrease with negative flows.

AUM Formula

The following is the formula to calculate AUM:

AUM = (NAV of mutual fund) x (total number of outstanding units in the fund)

However, the AUM of any mutual fund may fluctuate daily as the Net Asset Value (NAV) also changes daily after the market's closure. 

Importance of AUM in Mutual Funds

Assets Under Management is a critical indicator when investing in a mutual fund. AUM has several advantages, some of which are:

• Reflects the size of the fund: The AUM provides a clear view of the size and scale of mutual funds. It shows the strength of funds in the market. Higher AUM indicates that the mutual fund is in a firm position in the market and is likely to get more investors and retain their existing ones. 

• Helps manage liquidity and stability: Funds with large AUM tend to have better liquidity, which makes it easy for fund managers to manage redemptions without affecting the fund’s performance. 

• Maintains operational efficiency: High AUM may also provide economies of scale. It reduces the expense ratio, benefiting the investors by improving their net returns. 

• Shows fund consistency: A steadily growing AUM shows the stability and consistent performance of the fund. It builds trust among investors over time and attracts various new investors with attractive funds. 

AUM and Expense Ratio Relation

The AMC deducts a certain amount from the total assets in a mutual fund to manage the portfolio and ensure proper fund administration. This annual overhead is known as the expense ratio. The total expense ratio is an inverse relation to the AUM size. Funds with higher AUMs tend to have lower expense ratios while those with lower AUMs tend to have higher expense ratios. This inverse relationship between the AUM and the Expense Ratio can be explained with the formula below:

Formula: TER = ( Average AUM/ Total Expenses )×100

Through this formula, we can interpret that, if the total expense ratio remains constant when the AUM is increasing, the expense ratio will notice a decline as the same expenses are distributed over a larger base

Currently, in India,  the total expense ratio can be set to any desired percentage by the mutual fund houses as long as it is under a prescribed limited. SEBI has introduced a tiered structure for the expense ratio. Effective from April 1, 2020, the limit on the Total Expense Ratio (TER) has been revised.

High AUM vs Low AUM: Which is Better?

High AUM and Low AUM both have advantages and disadvantages for mutual funds. Usually, a high AUM indicates the trust and confidence of investors in a fund's reputation and market position. However, a low AUM also has the flexibility to invest in different opportunities and may also get slightly better returns. Generally, the mutual fund performance is independent of fund size and AUM.

No universal rule can detect the behavior of mutual funds of high or low AUM. Each type of mutual fund behaves differently with high AUM. Here, the fund manager makes a significant contribution and manages the fund with the right skills and decision-making ability. A fund manager drives the fund returns to generate high returns even when the market is fluctuating. So, it is better to make your investment decision based on other factors as well. 

AUM vs NAV: Understanding the Difference

Here is a further breakdown of the differences between AUM vs. NAV: 

How AUM Impacts Mutual Fund Performance

Generally, the size of the AUM does not equate to the performance of a particular fund. Rather, its returns are mainly dependent on the expertise of the fund manager and the category to which the fund belongs.

If a particular fund belongs to the equity category, it has the potential to deliver comparatively better returns as opposed to debt funds which give lower yet stable returns.

If the funds belong to the same category, the size of the Assets Under Management (AUM) can slightly influence the fund's performance. This is due to the fact that the expense ratio of the fund decreases as the AUM increases, which can ultimately lead to better returns for investors.

Conclusion 

AUM is the total cumulative investment sum of any particular mutual fund. AUM is calculated by summing up the total value of assets or capital that a mutual fund holds. The assets or capital can be stocks, bonds, money market instruments, securities, or other financial instruments. It involves the investor’s money and earnings from those investments made with the help of fund managers’ strategies. It represents the overall market value and position that the fund holds. Understanding what is AUM in mutual funds allows you to make informed investment decisions.

FAQs

Q. Is high AUM good for mutual funds?

If AUM is high, it increases market influence and negotiation power for better terms. However, the flexibility and potential difficulties to maintain high returns also grow. High AUM is good for mutual funds as it offers trust and confidence to investors if all other factors are also going well.

Q. Which fund has the highest AUM in India?

SBI Funds Management has the highest AUM in India with ?1100886.17 crores. It is the highest AMC in the mutual fund industry.

Q. Is it better to have a high or low NAV?

NAV reflects the per unit value of the fund at which the investors can buy and sell. A high NAV often suggests an established fund with accumulated growth, while a low NAV might suggest a relatively new fund. However, this factor does not make one inherently better than the other. 

Rather, investors will want to focus on historical performance, risk-adjusted returns, expense ratios, and investment strategy when evaluating mutual funds.