Assets under management (AUM) is like a measuring tape for how big a mutual fund’s portfolio is. It is a total value of all the assets (money) that a mutual fund or an institution manages on behalf of its clients. Knowing AUM is important for people who invest their money. Let’s take a closer look at what it means.
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. The larger the AUM, the more money the fund managers and the company running the fund can make.
Returns: Mutual fund returns show how much your investment has grown over time compared to what you initially put in.
How is AUM 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 profits.
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, but they might also have higher minimum investment requirements, which could make them less accessible to some investors.
Correlation between AUM and Returns
There is a connection between the size of a fund (measured by its Assets Under Management, or AUM) and the returns it offers. When a fund grows bigger, it’s expected to lower its fees. So, if you compare two funds with similar investment returns but different sizes, the larger one usually charges less. This means that after accounting for fees, the larger fund might give you higher returns. This is especially noticeable in debt funds, where larger funds can be more competitive and charge lower fees due to market pressure. So, the relationship between AUM and returns is mainly influenced by how expenses change as the fund size changes.
When a fund becomes really big (in terms of AUM), it can’t invest in as many good stocks because it’s too large. Even if it does invest in a smaller, promising company, it won’t make much difference to its overall success. So, smaller funds can be more flexible. Going by the past trends, some smaller funds did great when they were small, but didn’t do as well once they got bigger. So, for investing in stocks, being big isn’t always better.
When a fund does well, lots of people want to invest in it. But as more and more people put money into the fund, it becomes harder for the fund managers to keep doing the same things they did in the past to make it successful. That’s because managing a bigger fund can be tricky. So, we can think of different sizes where a fund might start to feel too big. For instance, a small-cap fund might start to feel big if it has more than Rs 5000 crore, a mid-cap fund might feel big with more than Rs 10000 crore, and a multi-cap fund might feel big with more than Rs 20000 crore.
FAQs
1. How does the relationship between AUM and Returns impact small and mid cap funds?
In small and mid-cap funds, higher Assets Under Management (AUM) can decrease returns due to limited investment opportunities, constraining performance potential. Conversely, lower AUM might allow greater flexibility, potentially enhancing returns through more nimble investing strategies.
2. Can you elaborate on the reasons behind the decline in returns as AUM rises?
As assets under management (AUM) increase, it becomes challenging to find high-yield opportunities, leading to diminishing returns due to liquidity constraints and reduced flexibility in investment choices.
3. Are there specific challenges associated with increasing AUM and diminishing returns?
Growing assets under management (AUM) may challenge fund managers to find profitable investments, resulting in lower returns because of limitations in scalability and heightened competition for superior returns.
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