Assets Under Management

The term, Assets Under Management, can be seen in every personal finance article, that talks about mutual funds. It is important to learn about this term because it helps you in choosing the right type of mutual fund for you.

The Indian mutual fund industry has grown tremendously over the past few years. Many are choosing mutual funds to achieve their financial goals. And the proof is in the pudding. According to AMFI (Association of Mutual Funds in India), the mutual fund industry's net AUM stood at ₹39,50,323.28 crore. On top of that, the AUM of SIP (Systematic Investment Plan) Funds touched a record of ₹6.6 lakh crore in October 2022, shows AMFI data.

The above data shows that the mutual fund industry continues to attract funds from Indian investors. It can also be seen how Indians prefer to invest in mutual funds via SIPs and how more and more people are choosing to invest in mutual funds every month.

Let’s take a deeper look at what assets under management are and how it works.

Assets under management (AUM), also called funds under management, is the total market of the securities a financial institution (like a bank, mutual fund, or hedge fund) owns or manages on behalf of its client.

The concept of AUM of mutual funds is similar to market capitalization while directly trading in the stock markets. The AUM is directly handled by the fund houses and the fund managers supervise the performance of these assets, taking investment decisions to help investors earn higher returns.

For example, let's take a mutual fund with a diversified portfolio of stocks and bonds and a considerable cash position. The mutual fund portfolio has ₹150 crore allocated towards stocks, ₹200 crore in government bonds, ₹150 crore in corporate bonds, and ₹100 crores in cash. So, the total value of the fund's assets under management will be ₹600 crore.

Typically, assets under management include funds that the manager can use to make transactions on a discretionary basis. For example, if you have invested ₹1 lakhs in a mutual fund, this money would become a part of the fund's overall AUM. Hence, the manager of the fund could buy and sell stocks and shares using the invested capital.

It is also crucial to note that the manager of your mutual funds' assets management company will charge a management fee, which covers their compensation and fixed compensation costs. Usually, the payment will be a flat rate charged to the overall fund, allocated proportionately to every investor. Depending on the details and specifications of the fund, the fee could be several percent or several thousandths of a percent.

The process to calculate AUM may vary for every mutual fund house. Usually, it increases when investments offer a consistent positive return for a long period. The positive performance of the fund attracts new assets and more investments, increasing the total amount of assets for that organization. However, the asset value reduces every time market plummets or investors redeem their shares.

The net changes in the value of AUM are reflected at the end of trading when the market closes for the day. The total valuation of an asset management company is important information for all investors to figure out the rate of profitability earned if invested in such mutual funds.

AUM is an important metric for investors for many reasons. Here are a few:

Going by the above explanation, all a mutual fund’s AUM tells you is how big or small a particular mutual fund is. So, is it an important factor to consider before choosing a mutual fund? Let’s talk about this in detail.

The net changes in the value of AUM are reflected at the end of trading when the market closes for the day. The total valuation of an asset management company is important information for all investors to figure out the rate of profitability earned if invested in such mutual funds.

Does this mean the top-performing mutual funds in India tend to attract more customers? Yes, because of the below two reasons.

The first reason is that a larger AUM fund or fund house can get better services in the industry and spend more on strengthening research, which helps investors get higher returns. The second reason is that the expense ratio of larger mutual funds tends to be lower as compared to funds with smaller AUM.

So, does this mean that the funds that have a larger AUM are the best for every investor? There are some who disagree with this statement as well. Some investors feel funds that are growing in AUM have become too big and may either fail to sustain their performance or have limited space to grow more. However, since these funds work with smaller amounts of money, they can face liquidity-related issues during mass redemption.

This brings up an important question for investors - Which funds are actually better? - The ones that have a larger or a lower AUM? The answer is, it depends.

If a mutual fund invests predominantly in large-cap stocks, its size is not really a matter of concern. These funds invest in big companies that are actively traded, so liquidity will not be a concern here. For example, a company that falls under the small-cap stock category is worth ₹1,000 to ₹1,500 crores. So, when a smaller fund with an AUM of ₹100-₹200 crore plans to invest 5% of its money in the former company, it can do that with ease because the investment money is not very high.

On the other hand, if a larger-sized mutual fund with an AUM of ₹5000 crore looks to invest 5% of its money in that company, it might not be possible due to the investment size. Even if goes ahead and invests in the above-mentioned firm, it may have to incur an 'impact cost', where the fund's trading activities can considerably affect the stock price. On top of that, it may not be easy for the fund to sell such a large investment if they plan to exit the investment at short notice.

In the previous topic, we explained in detail how assets under management play an important role when it comes to the performance of funds with either large or small mutual funds. Now, we are going to understand the importance of AUM in different types of mutual funds.

Generally, equity mutual funds offer a good return and outperform the benchmark index through market highs and lows. Equity funds depend less on AUM and more on the fund manager's skill to increase its returns.

Total assets managed by a fund are one of the most important factors of debt funds. These funds, which have more capital, can spread their expenses across a larger group of investors. This will reduce the fixed fund expenses for every individual and increase the returns.

When it comes to large-cap mutual funds, the returns from them mostly depend on the yields provided by the market. Typically, the returns earned from mutual funds don't depend on the AUM. There are several cases where companies of a smaller asset class have earned considerably more revenues, in spite of the shareholders acquiring significantly fewer stocks of those institutions when compared to companies with more assets.

Generally, these funds do not depend on Asset Under Management by a huge margin. These mutual funds are only affected when the assets grow beyond a significant point, namely when fund houses become major shareholders of a particular company. The important thing to note here is that small-cap mutual funds often avoid calculating AUM and invest in SIPs (Systematic Investment Plans) instead of larger investments.

The expense ratio is the percentage that denotes the amount of money you are paying to the AMC (Asset Management Company) as a fee for managing your investments. The expense ratio differs from one mutual fund to another.

The AUM has a direct relation with the expense ratio levied by mutual funds, which implies higher charges might be incurred while investing in mutual funds of a relatively larger size. On the other hand, the SEBI regulations stipulate that the expense ratio of a mutual fund has to be strictly less than its AUM.

We hope you are able to understand all about Asset Under Management in this article. If you are trying to choose the right mutual fund for you only based on the AUM, then, it is a good idea to reconsider the parameters in which you choose the right mutual fund. More than the size of the fund, what actually matters is the skills of the fund manager, who can find out investment opportunities and help you earn higher returns.

If you wish to learn more about other concepts such as Capital Gain Taxation, Cost Inflation Index, and more, please read our blogs. We also write about all types of mutual funds, including Equity Mutual Funds, Debt Mutual Funds, and ELSS funds, as well as, other types of investment instruments, such as Fixed Deposits, Digital Gold, and Smart Deposits. You can check out all the topics in our Blogs section. You can also check out our Calculators, where you can learn more about how much wealth you can accrue in certain years.

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