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What is Asset Under Management?

Created on 04 Jan 2023

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What is Asset Under Management?

Assets under management or AUM refer to the total market value of investments that an entity or a mutual fund manages on behalf of clients. AUM normally includes bank deposits, cash and assets. These assets can be further classified into equities, bonds, commodities etc., which are placed under discretionary management.  

Assets under management are one of the key parameters considered while evaluating a fund house. Normally, higher investment inflows and higher AUM is considered a positive indicator of quality and fund management experience. 

Assets under management are not a constant value but fluctuate daily based on the fund inflows and outflows from the investors into the fund or portfolio. It also varies based on the prices of the underlying assets in the asset management pool. 

Mutual funds with larger AUMs attract most customers easily. The fees levied by managers employed under fund house are a percentage of the total assets under management.

A large AUM is often used as a marketing tool by fund houses, but a large AUM is not necessarily a positive factor. Read on to explore the various intricacies involved with AUM.

What is the AUM in a Mutual Fund?

The AUM of a mutual fund refers to the collective sum of all the assets which are under the management of a particular fund manager. As explained before, assets under management include cash, bank balances and whatever underlying asset class that the fund manages. 

If the fund is an equity mutual fund, the bulk of the assets would be equities belonging to the large-cap, mid-cap or small-cap companies, depending on the fund’s orientation. If it is a bond mutual fund, the bulk of the assets would belong to the fixed-income category. 

The AUM of a mutual fund collectively represents both the capital invested and the appreciation earned on the fund since the beginning of the investment. 

Two factors cause changes in the AUM of a mutual fund:

  • The client inflows and outflows of the mutual fund
  • The changes in the Net Asset Value (NAV) of the fund that is based on changes in the underlying prices of the asset pool.  

The AUM is to mutual fund assets what market capitalisation is to a listed company.

Importance of AUM

The AUM in a mutual fund is normally interpreted as a reliable indicator of fund management. When a fund is doing well, its AUM goes up. This happens not only because of the appreciation of its underlying assets but also due to increased inflows from new customers who want to get on the bandwagon of a profitable fund. 

Moreover, one of the important factors in ranking a fund manager’s performance is the total AUM under their management control. The total value of the AUM is one of the factors that define the size and success of a company. 

A higher AUM can also be a marker of good fund management as the price of the underlying asset is also reflected through the AUM. Proper administration leads to growth in the value of AUM as the selection of fundamentally strong assets leads to the appreciation of the AUM as well.

It may reflect the reliability and stable track record of the fund manager. However, we must remember that AUM must not be considered in isolation but taken along with other factors to give a ranking or make a fund selection choice.  

How to Calculate AUM?

Fund investments = Opening value cash + bank balances + underlying pool of investments (equity, fixed income, commodities) + fresh inflows of capital - outflows of capital from redemptions + appreciation/depreciation) in the underlying balances during the period + reinvested dividend or interest income - transaction fees - asset management charges and fees 

If the underlying assets increase during this period, the AUM of the fund appreciates, and if they reduce, the AUM correspondingly depreciates. This is an everyday phenomenon that takes place as the fund house buys and sells more securities that it manages.

Similarly, when there are mass inflows of new customer SIPs and lump sum investments, the AUM increases, and when there are many redemptions, it reduces. 

The asset management fee, transaction charges and other expenses are reduced from the gross Net Asset Value (NAV) of the fund before calculating the final NAV. 

Reinvested dividend incomes plus interest also appreciate the AUM of a mutual fund. Whenever these are paid out, the AUM reduces to that extent. Last but not least, capital appreciation and depreciation affect the AUM of the fund.

Impact of High AUM on Mutual Funds

Fund managers in mutual funds handle the AUM of the mutual funds. They supervise the performance and try to beat the benchmarks against which their performance is measured. 

For instance, they rotate the AUM by entering and exiting securities and trying to maximise the capital appreciation potential. AUM is one of the metrics used to measure the fund manager's performance and assess their track record. 

It is an important size parameter for funds and is used in ranking exercises extensively. It indicates the investment flows, quality and investment experience of the fund manager who is in charge of the fund management. Fees earned by the manager and administrator of the fund also depend on the size of the AUM. 

The AUM fluctuates nearly daily, and the funds with high AUM carry more liquidity to take advantage of market opportunities and any redemption requests that may arise.

Asset-rich companies are usually preferred by clients. High AUMs do not automatically have high capital appreciation in the underlying assets. 

Here are the mutual funds with the largest AUMs in India:

S.No

Name of Fund

Average AUM at the end of the June quarter

1.

SBI Mutual Fund

Rs 647064.29 crores

2.

HDFC  Mutual Fund

Rs 432084.97 crores

3.

ICICI Prudential Mutual Fund

Rs 468258.02 crores

4.

Nippon India Mutual Fund

Rs 280263.07 crores

5.

Axis Mutual Fund

Rs 260335.18 crores

6.

DSP Blackrock Mutual Fund

Rs 107873.94 crores

7.

Kotak Mutual Fund

Rs 285617.80 crores

8.

Tata Mutual Fund

Rs 86396.95 crores

9.

Aditya Birla Sun Life Mutual Fund

Rs 295084.91 crores

10.

L&T Mutual Fund

Rs 75591.56 crores

How Much AUM is Good for a Mutual Fund?

Fund AUMs range from Rs 10 crores to Rs 30,000 crores. Ideally, a fund AUM should neither be too large nor too small. As explained in the previous paragraph, funds with large AUMs do not necessarily reflect a superior performance in the underlying assets. Large AUMs also get difficult to manage, irrespective of the fund manager's experience.

Similarly, a fund with a smaller AUM size may register better performance metrics. You should assess many other parameters like the past track record of the fund, expense ratio, fund manager's history, fund house credentials and risk, and return parameters before deciding to invest.

However, in the case of funds with smaller AUMs, there is also the risk of liquidity being available at the time of redemption. In that case, you should consider funds with AUMs of at least ₹500 crores to invest. This is a more manageable fund size for the Fund Manager. The fund should also find it easy to meet redemption requests.

You also have to consider AUMs by the underlying asset class of investments. In the case of debt funds which have large AUMs, the expense ratios will be lower as it is spread over a larger pool of assets. 

But in all funds, no matter the underlying asset class, a definite percentage should always be maintained in cash to meet redemption requests. When a fund is not able to meet redemption requests, it affects the fund’s reputation. 

The fund manager must always create an asset allocation that maintains the balance between the optimal level of liquidity and investments in the underlying assets. You must always carefully choose funds and screen funds which have a small proportion of cash in their AUM.

Impact of Market Movements on the Mutual Fund AUMs 

Like all assets, changes in the market prices, either in the upward or downward direction, affect the AUMs of mutual funds. The AUMs of mutual funds appreciate or depreciate in accordance with the market prices of the underlying assets, whether they are stocks, bonds or commodities. 

All mutual fund assets are linked to the market, which means that they are revalued daily at the closing prices of the underlying assets in the AUM of the mutual fund. 

These prices reflect the underlying trend inherent in the assets for that day. So your investments in mutual funds are susceptible to changes in the market trends of the different assets. Remember the line, "Mutual fund investments are subject to market risks…"?

That is why mutual funds calculate a daily Net Asset Value for the fund. This also determines the expense ratio of the fund, which rises and falls with changes in the AUM of the fund.

Performance of Mutual Funds with the Top 5 AUMs in India

The Indian mutual fund industry has total assets of ₹40.37 lakh crores as of November 2022. The profitability of mutual fund schemes and the affordability of making SIP investments attract many Indian investors. 

We must remember that starred mutual funds, the expertise of the fund manager, and the past track record of performance of the mutual fund play an important role in our choosing mutual fund assets. 

Here's a brief of some of the more prominent fund houses in India:

SBI Mutual Fund

This is the second-largest AUM in India, starting its operations in 1963. It is ranked behind Unit Trust of India, which controls a much larger corpus. It is a top mutual fund with more than 146 funds under its umbrella. With more than three decades of performance experience, SBI offers many mutual fund schemes across diverse asset classes to meet the risk-return parameters of different investors.

HDFC Mutual Fund

HDFC Mutual Fund launched its first scheme in 2000, and since then, it has not looked back. It offers a range of fixed-income, equity and balanced funds. HDFC has some of the top-performing funds in every asset class.

ICICI Prudential Mutual Fund

ICICI Prudential Mutual Fund offers a broad spectrum of solutions for both corporate and retail customers. ICICI Prudential Mutual Funds offer several schemes like equity, debt, ELSS, balanced, hybrid and liquid funds.

Aditya Sun Life Mutual Fund

This is one of the upcoming mutual fund houses in the country. Whether we want to create tax savings, personal savings or wealth creation, Aditya Birla Sun Life Mutual Fund helps us in our quest.

DSP Blackrock Mutual Fund

Blackrock is a globally renowned Asset Management company. DSP Blackrock has been set up in association with Blackrock to create diverse mutual funds to cater to the needs of diverse investors. It has decades of performance excellence in asset management and investments.

In addition to these, there are many other fund houses which provide a range of mutual funds to cater to every investor's needs.

Mutual Fund Houses Restricting SIP Amounts

Mirae Asset Management Emerging BlueChip fund recently decided to bring down the Systematic Investment Plan (SIP) amount to ₹2,500 per month. The scheme allows fresh registrations through SIP for a maximum amount of up to ₹25,000 through the monthly or quarterly mode. 

One of the reasons for the same could be that the fund’s AUM reached a certain size which was felt by Mirae Asset' management to be optimal, and increasing it beyond this size would make the fund’s performance sub-optimal.

The Bottom Line

The above article is supposed to provide insight into the mutual fund ranking by AUM. You must, however, consider all the other factors enumerated in the article before making a decision to invest in the mutual fund offered by a particular fund house. Mutual fund investments must be a calculated decision taking into account our risk-return profile and how the fund meets the investment objectives.

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