AUM is the primary means of evaluating a mutual fund and is crucial in helping investors assess a company or their investment in that company. If you are looking for investment options in mutual funds, you just can’t skip learning about this attribute – AUM. Buckle up to learn about AUM with us! First things first –
What is AUM in Mutual Funds?
In mutual funds, AUM is the total market value of all assets. Mutual funds collect money from many investors to build a diversified portfolio of assets handled by professional fund managers. The value of these assets would constantly vary from time to time because of market movements that influence the AUM of the fund.
AUM is an important aspect of mutual funds as it showcases the size of the fund and can be utilized as a means of its success in enchanting and keeping hold of investors. AUM is also used to calculate the expense ratio charged by mutual funds.
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Sat 14 Dec. 2024
Note: Before we can dive into the details of the concept and role of AUM, you should first know the full form of AUM, which stands for Assets Under Management.
Importance of AUM
Many investors give the AUM of a mutual fund notable significance while choosing which fund to invest in. But, if you are wondering if it is really that important, you should know that the importance of AUM depends on the type of mutual fund you are willing to invest in.
For reference, in the case of equity mutual funds, the AUM is not something that the investor needs to have a central focus on. Rather than that, they should be showing more importance on other features of the mutual fund, such as an expert fund manager and the expense ratio between others.
In the matter of debt mutual funds, the value of AUM plays a vital role. The size of investors tends to rise equal to the AUM. Therefore, this gives the fund houses the opportunity to widen the operating expenses to an even more extensive investor base, which will result in a lower expense ratio and the development of returns.
Impact of AUM on Mutual Fund
It would be beneficial for every individual to be aware of the effects of AUM on funds, as it would help them make safer moves. If a fund has a big AUM, it may be challenging to obtain high returns. This might happen because it could be difficult to find the correct investment opportunities that help to achieve more gains without inhibiting the market.
On the other hand, a smaller fund might tend to be more flexible, resulting in receiving gains from other investment opportunities and more returns.
The AUM of a mutual fund can also impact the specific fees that investors pay to invest in the fund. SEBI has assigned a tiered structure for the expense ratio, where more significant funds tend to have smaller fees, and smaller funds will be able to have higher minimum investments, which might limit their accessibility to a few investors.
Difference between NAV and AUM
NAV conveys the price at which a share of a particular fund can be acquired or sold. However, AUM indicates the total value of assets that an individual tends to manage. The differences between the two are explained in the table given below. Let’s find out how NAV and AUM are different from each other:
| AUM | NAV | |
|
It is the whole market value of all assets handled by a firm.
|
The net value of a specific fund is equivalent to investors’ fair-mindedness.
|
|
All of the complete funds
(securities as well as cash).
|
Total assets minus whole liabilities.
|
|
Varies all-day.
|
It is calculated at the end of the day.
|
|
Dimensions of the asset manager include the belief of its investors, presentation gains, and experience.
|
How much is left after liquidation, and what is the share price?
|
How to Calculate AUM?
AUM tends to vary from time to time, and its value varies according to the performance of invested assets in different market regulations. Hence, it is beneficial for investors to know how to calculate AUM to receive gains and safeguard themselves from inevitable downfalls. Keep reading to understand the main factors that calculate AUM.
You need three critical factors to calculate the market price inflows and outflows:
- The AMC (Annual Maintenance Contract) collects the investor’s money to invest; outflows and inflows that occur in any fund, and you read that AUM constantly varies depending on the investors or funds.
- Investors generally use net proceeds to regulate AUM; positive net proceeds figures mean that AUM funds are rising, and negative figures mean that AUM is reducing.
- Different fund houses tend to adapt to different structures to obtain the AUM. Specific AMCs might be inclined towards mutual funds, adding to deposits and cash in hand, whereas some other AMCs may only consider the funds that can be used for trading in place of clients.
The process of AUM calculation is simple. You can know the simple steps of how to calculate AUM with just two steps:
Step 1: You must multiply the number of shares or units held by investors by the current market price of each unit.
Step 2: Then, finally, add up the total value of all units.
Conclusion
The bigger the AUM of a fund is, the better its liquidity will be. This allows you to enter and exit the fund whenever you wish to without facing any problems. Nonetheless, the AUM of a mutual fund does not bear on its performance. Some cases of funds also contain high AUM underachieving and conversely.
