What is an Asset Under Management in Mutual Funds?

Many of you must have heard that AUM in mutual funds reached Rs. 66.70 trillion by August 31, 2024. But what exactly is AUM? Simply put, AUM, short for Assets Under Management, refers to the total value of the assets managed by a mutual fund. It’s an important metric that provides insight into a fund's size, growth, and overall success. In this article, we discuss in detail the meaning of AUM in mutual funds, the AUM formula, and its importance.

What is Asset Under Management in mutual funds?

AUM in mutual funds means the total market value of the investments that a mutual fund or asset management company manages on behalf of its clients. The AUM is often used as an indicator of the size of the mutual fund, and it changes depending on market conditions, investor inflows, and withdrawals. A growing AUM suggests that more investors trust the fund with their money, which indicates the investors’ confidence in the fund's performance.

How is AUM Calculated?

When calculating a mutual fund's AUM, three key factors are taken into account: inflows, outflows, and market performance.

Inflows represent the money that investors put into the fund, whether new investors join or existing investors increase their investments. Outflows refer to the money leaving the fund when investors redeem their shares or withdraw.

Market performance also plays a crucial role, as the value of investments increases or decreases based on their performance. If the investments perform well and their value rises, the AUM increases. On the other hand, if they lose value, the AUM decreases.

To get the net change in AUM, you take the inflows, subtract the outflows, and add or subtract the change in market value. AUM is always changing, depending on market conditions and investor actions.

What is the importance of AUM in different mutual funds?

The importance of AUM differs for every fund type.

Equity funds

More than AUM, equity fund returns are influenced by the asset manager's skills and market movements.

Large-cap funds

These funds' performance depends more on market yields and investment strategy than AUM size. A large AUM can indicate how well-established a mutual fund company is, but actual scheme performance depends on the fund manager’s decisions, stock selection, and stock performance.

Mid-cap and small-cap funds

Like large-cap funds, the performance of small and mid-cap funds depends on investment strategy and market trends, not AUM size. However, because small and mid-cap stocks are more volatile, the AUM can fluctuate significantly.

Debt funds

A larger AUM reduces individual fund costs and can lead to higher returns, as operating expenses are shared across a larger asset base.

To end

While understanding AUM’s meaning in mutual funds offers valuable insights into how popular a mutual fund is among investors, it should not be the only factor in deciding on an investment. Before making any investment decisions, you must always compare a mutual fund's performance against its benchmark and peers. If you’re planning to start your investment journey in mutual funds, consider using Tata Capital Moneyfy. Visit the Tata Capital Moneyfy website or download the app today!