What is Asset Under Management (AUM) in Mutual Funds

Before learning about AUM, let us know a little about AMCs.

AMC stands for Asset Management Company and manages and operates the mutual funds. It pools money from retail and institutional investors and invests that fund in a diversified portfolio of stocks, bonds, and other financial instruments. AMCs have dedicated research teams and fund managers who make decisions on the allocation of assets and portfolio management. AMCs earn fees for managing mutual funds, a percentage of the fund’s AUM.

What is AUM?

AUM stands for asset under management. AUM in mutual funds refers to the total market value of all the assets a mutual fund manages on behalf of its customers. It is an essential metric in the financial markets. A larger AUM generally implies a larger fund with more investors. The respective mutual fund scheme AUMs can be found in the monthly fact sheet of the AMCs on their website or online mutual fund research platforms.

Indian Mutual Funds Industry

Before getting into the Indian mutual funds industry, let us know about the history of mutual funds. To make India financially stable, strong, and independent and encourage saving and investment, the first mutual fund was established in 1963, Unit Trust of India, by a combined initiative of the Government and the Reserve Bank of India by an act of Parliament. The mutual funds industry has grown significantly over the years. Unit Scheme 1964 was the first scheme that UTI launched.

In 1993, the first set of SEBI Mutual Fund Regulations existed for all mutual funds except UTI. The former Kothari Pioneer (now merged with Franklin Templeton Mutual Fund) was the first private-sector mutual fund registered in July 1993.

With the entry of private sector funds in 1993, a new age began in the Indian MF industry, giving Indian investors a wider and better choice of Mutual fund products.

The MF Industry’s AUM has grown from ₹ 22.24 trillion as of October 31, 2018, to ₹46.72 trillion as of October 31, 2023, more than a 2-fold increase in 5 years (source- AMFI website). The Indian Mutual Funds industry has witnessed robust growth over the years. The sector provides investors with different mutual fund categories like equity, debt, and hybrid funds catering to their risk profiles and preferences. Not only this, the mutual fund industry in India has also undergone a digital transformation.

Calculation of AUM

AUM in mutual funds is calculated by adding up the market value of all the securities, cash, and other assets mutual funds hold.

The formula for the same is listed below

AUM= Market Value of Securities + Cash & Cash equivalents + Other Assets

For example, a mutual fund holds the following

The market value of securities = Rs. 50 Crore

Cash & Cash equivalents = Rs. 7 Crore

Other Assets = Rs. 3 Crore

Therefore, AUM = Rs. 50 Cr. + Rs. 7 Cr. + Rs. 3 Cr. amounts to Rs. 60 Crore.

It’s important to note that the actual calculation may involve more detailed considerations, especially in a real-world scenario where the portfolio may consist of various types of securities, derivatives, and other financial instruments. Moreover, the market values of securities can fluctuate, affecting the AUM over time.

Remember that the total value of AUM keeps changing depending on the performance of the assets.

Significance of AUM in different Mutual Funds Categories

1. Larger AUM in equity funds, whether large or mid-cap, reflects a broader investor base and better scale of operations. However, a larger AUM while investing in small-cap companies can pose challenges. Therefore, small caps do not concentrate much on AUM.
2. Smaller AUM in sectoral and thematic funds may indicate a more focused approach to investment since these funds often focus on specific sectors and themes.
3. In the case of hybrid funds, a mixture of equity and debt, a larger AUM can provide better diversification benefits.
4. Fixed-income funds like bonds also need a larger AUM for better diversification.

Factors affecting AUM

1. Performance of the Market

When markets are performing and in a rising phase, investors are more likely to invest, resulting in increased inflows and higher AUM for investment companies. In falling markets, investors redeem the funds, resulting in a decline in AUM.

2. Fees & Expenses

The expenses charged by asset management companies can influence AUM. Lower fees can make the funds more eye-catching to investors.

3. Advertisement & Distribution of Funds

Effective marketing and distribution policies are vital in attracting new investors and growing a firm’s investor base. Successful marketing campaigns and a strong distribution network can help the MF house generate inflows and increase AUM.

4.  Economic Conditions

The global economic environment can also affect AUM. When a country is economically stable and in its growth phase, more investments will occur, leading to higher inflows.

5. Past performance

The historical show of a company plays a vital role in determining AUM. Funds generating consistent positive returns will eventually attract new investors.

How Expense ratio is related to AUM

For this, first, we need to understand what is the expense ratio. The expense ratio is defined as the annual cost of managing and operating mutual funds. AMCs charge these expenses and are a percentage of AUM., for example, management fees, administrative expenses, and Distribution expenses. Formula for calculating Expense Ratio = (Total Fund Expenses / AUM) *100. Therefore, there is an inverse relationship between AUM and the expense ratio.

As AUM increases, the overall percentage of expenses relative to assets decreases. Keep in mind that AUM influences the calculation of the expense ratio and plays a vital role in structuring the overall cost of the fund and

Conclusion

To wrap it up, AUM is an important metric for investors when it comes to selecting mutual funds. It can only provide insight about the AMC but cannot be the sole factor when making investment decisions also, a higher AUM does not signify better returns and performance by the mutual funds. The significance of AUM can fluctuate across different fund categories.

Frequently Answered Questions (FAQs)

1.  What is AUM?
AUM stands for asset under management and is the total market value of all the assets that a mutual fund manages on behalf of its customers

2.  What is the formula for calculating AUM?
The formula for calculating AUM is

AUM= Market Value of Securities + Cash & Cash equivalents + Other Assets

3.  How is the expense ratio and AUM related?

Expense ratio and AUM share an inverse relationship, i.e., an increase in AUM decreases the expense ratio.

4.  Who manages the mutual fund?
Asset Management companies manage mutual funds.

5.   When was the first mutual fund in India established?
1^st mutual fund in India was established in the year 1963.