What is an AUM?
Assets Under Management (AUM) in mutual funds means all the money that the mutual fund manages for its investors. It includes everything the fund has invested in, like stocks, bonds, and other securities.
Mutual funds serve as collective investment vehicles, pooling funds from numerous investors to create diversified portfolios managed by seasoned professionals. These portfolios consist of various assets whose values are subject to continuous shifts driven by market dynamics. Consequently, the AUM of mutual funds fluctuate in tandem with these market variations.
Think of AUM as an important factor for mutual funds because it shows how big the fund is and how successful it is at getting and keeping investors. AUM is also key in figuring out the Expense Ratio, which is the fee you pay for investing in the fund. Expense Ratio usually decreases as the size of the fund increases as per the regulator guidelines. On the other hand, as the size of the fund becomes very high, it may affect the fund manager’s ability to effectively allocate funds and continuously beat the benchmark indices.
How AUM is calculated?
The calculation of AUM involves multiple factors, primarily inflows, outflows, and market prices. Fund houses employ various methodologies to compute AUM. At any given moment, both inflows and outflows contribute to the dynamics, yielding net flows (inflows minus outflows). Positive net flows typically lead to asset growth, though not always. Moreover, fluctuations in the market price of underlying assets also influence AUM, albeit not consistently.
When net flows are positive and market prices rise, AUM goes up. If net flows are negative and market prices fall, AUM decreases. If one factor is positive and the other negative, the stronger effect determines the direction of the AUM change.
How important is AUM in mutual funds?
Shows how big the fund is
A fund’s AUM tells you how large it is. A bigger AUM means the fund is well-established and can attract more investors and make bigger investments. People often like to invest in funds that have a good track record and are growing well.
Affects where the fund invests
The size of a fund’s AUM can affect where it puts its money. For example, if a small-cap fund gets too big, it might struggle to invest in smaller companies because there aren’t enough of them. This can limit its investment options.
Influences how well the fund performs
A mutual fund’s performance can be influenced by its size, called AUM. When a fund has a lot of money (large AUM), it can be harder to make big profits without causing problems in the market. But smaller funds have more freedom to find special investment chances and make higher returns.
Affects the fees investors pay
The AUM of a mutual fund can also affect the fees investors have to pay. Regulators often set fees based on the size of the fund. Larger funds might have lower fees compared to smaller size funds.
FAQs
1. What is included in AUM?
Assets under management encompass the comprehensive portfolio of financial resources overseen by a financial institution, fund manager, or wealth manager, representing the collective investments made by their clients. These assets span diverse categories such as equities, fixed-income securities, liquid funds, real estate holdings, and various other investment instruments.
2. How much AUM is good for a mutual fund?
Mutual fund houses naturally aim for increased AUM as they earn fees based on these assets. Nevertheless, there are instances where fund managers restrict inflows into certain funds if they perceive that the fund has amassed more capital than it can effectively deploy.
From an investor’s standpoint, the optimal AUM varies. Generally, investors in equity funds should exercise caution with both very small and very large funds. Small funds might lack a track record or face limitations hindering their growth. Conversely, excessively large funds may struggle to outperform peers due to reduced agility. However, it’s essential not to evaluate a fund solely based on its AUM. Other performance metrics should also be considered for a comprehensive assessment.
3. What happens when AUM increases?
When the Assets Under Management (AUM) increase, it means the financial institution or fund manager is managing more money from clients. This can bring in more revenue for them because they typically charge fees based on the AUM. A higher AUM also shows that investors trust the fund more, which can attract even more investors. It’s like a cycle: as the fund does well, more people want to invest in it, which further increases the AUM.
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