Savvy investors use it when they talk about mutual funds. Distributors give it its due importance when selecting schemes for investments. Research analysts pay close attention to it when estimating the earnings of mutual fund companies. A key term which is frequently used and has almost become synonymous with the mutual funds industry is AUM. It is an acronym for Assets Under Management (AUM). So, what exactly does AUM mean? And what you should know about AUM? Let us understand:
What is Assets Under Management (AUM)?
India’s mutual funds industry has Assets Under Management (AUM) of Rs 36.73 trillion as on September 30, 2021, according to data from AMFI or the Association of Mutual Funds in India.
Put simply, Assets under Management (AUM) is the money value of all the securities and cash held in investors’ portfolios which are managed by a portfolio manager or a mutual fund at any given moment in time. The AUM can be specific to a scheme, to a fund house or to the entire industry. Mutual fund houses also keep a track of AUM brought in by large investors or even a distributor.
How does the AUM change?
The AUM changes from time to time. The AUM can rise when a fund manager selects the right securities in her portfolio. When prices of these securities go up, the AUM increases. The AUM also increases when investors bring in more money in schemes.
The AUM can also decrease. It goes down due to the poor performance of a fund manager or due to large redemptions by investors.
Changes in the AUM indicate the changing fortunes of a mutual fund. If a mutual fund house has seen a massive rise in the AUM, then either it has performed very well or has seen large inflows in its schemes. It could also be a combination of these two factors. Rising AUM of a fund house reflects its credibility, success, and a growing acceptance of the fund house by investors.
Where can you get AUM data?
Mutual fund houses generally disclose AUM details of all their schemes along with portfolio disclosures once in a month. AMFI gives out monthly data about AUM for the industry as well as for some of the key categories of schemes of mutual funds here.
AUM and fees
Mutual funds charge fees in the form of expense ratio of a scheme. The expense ratio is expressed as a percentage of the AUM of a scheme. The capital markets regulator, Securities & Exchange Board of India has clearly defined the expense ratio in its guidelines.
For example, an equity fund can charge up to 2.25 percent towards total expense ratio on the first Rs 500 crore of the AUM. For the same AUM, a debt fund can charge a maximum of 2 percent. As the AUM increases, the expense ratio that can be charged goes down. The regulator has also clearly provided for charging extra expense ratio, subject to certain conditions.
AUM of schemes and performance
Though a large AUM reflects the popularity of a scheme among investors or good performance in the past, there is no guarantee that a mutual fund scheme or a mutual fund house will continue to perform well in future. However, there is no evidence that the AUM has a bearing on the performance of a scheme of a mutual fund.
Managing large AUM in small cap equity funds can be a difficult task. The reason being that small cap equity funds invest at least 65 percent of the money in small cap stocks which may be illiquid. SEBI defines a small cap company as any company listed below the top 250 companies in terms of market capitalisation.
Some fund houses had restricted investments in small cap schemes in the past. Some fund houses accept money in small cap equity funds through Systematic Investment Plans (SIPs) with a cap on the maximum installment amount. This also holds good for some schemes which use an investment strategy that cannot handle too large inflows. In such cases, the mutual fund house itself restricts inflows, capping fresh investments.
While some equity funds may find it difficult to handle large AUM, debt funds prefer to have a large AUM. A small AUM can drag the performance of some debt funds. The minimum ticket size in bond markets can be high as compared to the equity market. For example, in the government securities market, the minimum ticket size of a deal is Rs 5 crore. In such cases, debt fund schemes are better off if they have large AUM.
Overnight schemes and liquid schemes, especially, have investments from large institutional investors. Owing to the nature of these funds, they may not be long-term investors. Thus, large redemptions by institutional investors can be handled effectively by a fund house if the AUM of such a scheme is large enough and widely held.
AUM and investment decisions
Though a large AUM makes many investors comfortable when it comes to investing in a mutual fund scheme, it should not be the only criterion to select a mutual fund scheme. Savvy investors assess schemes’ investment objectives, strategy, portfolio construction and overall past performance before investing in them.
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