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Assets Under Management (AUM) measure the total market value of financial assets managed by a mutual fund scheme or Asset Management Company (AMC). This article breaks down how AUM is calculated, why bigger does not mean better, how it differs from Net Asset Value (NAV), and its real-world implications for your investment strategy. While AUM helps investors understand a fund's overall size and scale, it should never be used as a standalone indicator of performance.
This article talks about AUM in detail along with its importance.
Key Takeaways
- AUM represents the total market value of assets managed under a specific mutual fund scheme or AMC.
- AUM fluctuates daily due to net investor flows and underlying portfolio market valuations.
- Higher AUM does not mean higher returns or lower risk.
- Regulatory bodies like SEBI require AMCs to publish monthly Average AUM (AAUM) to ensure transparency.
- Excessive AUM in small-cap or mid-cap funds can create liquidity challenges for fund managers.
What is AUM?
Assets Under Management (AUM) is the total market value of all financial assets managed by a mutual fund scheme at any given time. It tracks the combined value of all securities, cash equivalents, and receivables held within a portfolio after accounting for accrued expenses. As a measure of a fund's size, AUM fluctuates daily based on two core drivers: market movements that alter portfolio valuations and investor transactions (purchases and redemptions).
How AUM Operates in Mutual Funds?
When investors allocate capital to a mutual fund scheme, the fund manager deploys that pool into equities, bonds, or money market instruments based on the stated investment objective.
The AUM rises when fresh capital enters the fund or when existing portfolio holdings appreciate in value. Redemptions or market corrections contract the AUM.
For instance, if an equity scheme holds securities worth ₹900 crore alongside ₹120 crore in liquid cash and receivables, minus ₹20 crore in accrued liabilities, its total AUM stands at ₹1,000 crore.
AUM vs Average AUM (AAUM)
- AUM: Reflects the total asset value at a specific point in time, reported at the close of a business day or month.
- AAUM (Average AUM): Calculated as the mean value of daily AUM over a specific period (such as a month or quarter). SEBI mandates AMCs to disclose monthly AAUM to calculate management fee tiers fairly and prevent market manipulation near reporting dates.
While investors monitor AUM to gauge fund size, regulators and AMCs rely on AAUM for fee calculations and regulatory reporting.
AUM vs Net Asset Value (NAV)
|
AUM |
NAV |
|
Total value of assets managed by the scheme |
Value of one mutual fund unit |
|
Indicates the size of the scheme |
Indicates the per-unit value |
|
Can change with investor flows and market movements |
Changes with the value of the scheme's net assets |
|
Usually expressed in crore or lakh crore |
Usually expressed as a rupee value per unit |
Does a Higher AUM Guarantee Better Returns?
A larger AUM does not automatically translate to superior performance or lower risk. While large-cap funds can absorb massive capital inflows due to high market liquidity, mid-cap and small-cap funds with disproportionately large AUMs often face impact-cost challenges.
When a small-cap fund holds excessive cash, the fund manager may struggle to deploy capital efficiently without driving up stock prices during purchases, potentially diluting returns. Consequently, many AMCs proactively restrict fresh inflows or cap lump-sum investments when a scheme's AUM grows too large for its mandate.
How is AUM Calculated?
The formula for calculating Assets Under Management (AUM) can be written as:
AUM = Market Value of Securities + Additional Applicable Assets - Liabilities
Component Breakdown
- Market Value of Securities: The current market worth of all the stocks, bonds, or other financial instruments held within the fund's portfolio. This figure fluctuates daily based on market movements.
- Additional Applicable Assets: Other holdings owned by the scheme, such as cash equivalents, receivables, or accrued interest.
- Liabilities: Obligations or expenses owed by the fund, including management fees, operational costs, or pending payouts.
Using the example provided where a fund holds ₹900 crore in securities, ₹120 crore in additional assets, and ₹20 crore in liabilities:
AUM = ₹900 crore + ₹120 crore − ₹20 crore = ₹1,000 crore
Dividing this total AUM by the 100 crore units outstanding gives a Net Asset Value (NAV) of ₹10 per unit.
Does Higher AUM Mean a Better Mutual Fund?
No, a fund with a large AUM is simply managing a larger pool of assets. It does not automatically have better returns or carry less risk.
For example, consider two equity funds.
- Fund A: AUM of ₹25,000 crore
- Fund B: AUM of ₹5,000 crore
Fund A is 5 times larger in terms of AUM. That tells us about the size of the two schemes, but little about which will deliver better returns in the future.
Fund B could have a portfolio that suits a particular investor better. Fund A could have a different strategy altogether.
Conclusion
AUM is a measure of size. It tells investors how much value a mutual fund scheme is currently managing or, more broadly, how much a fund house manages. The number can move for several reasons. Investors may put money into the scheme, investors may redeem units, or the market value of the portfolio may change. A rise in AUM therefore does not always mean that more investors are putting money into the fund. Similarly, a fall does not always mean that investors are leaving.
