How important is AUM factor in Mutual Fund Analysis?

5 min read
AUM is an indicator of the size and success of a fund house. One can easily compare its assets under management in various timelines and market phases performed as opposed to its peers.We will look at Asset under Management perspective while analyzing mutual funds. For this the type of mutual fund should be taken into consideration.

Should you consider AUM before investing?

Let’s say you invest cash into an AUM mutual fund. Several other investors will be investing in the same fund plan as you. The Assets Under Management value is calculated by adding all of the investments made by all investors (individual and institutional) (AUM). This article has covered the following topics:

In this article, we’ll learn everything there is to know about ‘What does aum mutual fund mean?’, ‘What does asset under management mean?’, and more!

What is AUM in Mutual Fund

Asset Under Management the whole market value of a mutual fund’s assets/capital is referred to as assets under management. These assets are managed by the fund manager, who makes investment choices on behalf of the investors. AUM is a measure of a fund house’s size and success. It is simple to compare the performance of its assets under management in India in various timelines and market stages to that of its competitors. The returns earned by a mutual fund are also factored into the AUM. The asset manager can invest it in securities, distribute it as dividends to investors, or keep it as is, depending on the investment mandate.

When examining mutual funds, we’ll take a look at the AUM (Asset Under Management). The sort of mutual fund should be considered in this case. What is the difference between a large-cap fund, a mid-cap fund, a multi-cap fund, and a small-cap fund? Is it a balanced fund or a hybrid type of fund?

Should you consider AUM before investing?

Investors in mutual funds asset under management funds generally look at them and are impressed if it is high. People believe that if a large number of people have invested in a fund, it must be a good one. However, there are numerous reasons why this figure should not be considered when selecting a fund.

Some of the most significant elements to evaluate are the expense ratio, the fund manager’s reputation, and compliance with the investing mandate. Let’s look at the importance of aum for various fund kinds.

Debt Fund

If you wish to invest in debt funds, AUM is an important issue to consider. Fixed fund expenditures can be shared over a larger number of investors in a debt fund with higher capital. As a result, the expense ratio per person can be reduced, resulting in higher fund returns. A larger fund’s asset base also aids the fund’s ability to negotiate fair rates with debt issuers.

Equity Funds

AUM is less important than consistency in returns and the fund house’s compliance with the investment objective. We define consistency as outperforming the benchmark at both market highs and lows. As a result, rather than popularity or size, an equity fund relies on the asset manager’s ability to consistently deliver positive returns.

Large-Cap Funds

The universe of large-cap funds is relatively large. Despite the fact that large-cap funds only cover 100 firms, these 100 companies have a lot of liquidity. As a result, a large-cap fund may handle a large AUM.

Mid-Cap Funds

The AUM capacity of a mid-cap fund is lower than that of a large-cap fund. Midcap enterprises range in size from 101 to 250 in market capitalization.

Large-cap, mid-cap, and even multi-cap funds can handle large AUMs, whereas small-cap funds prefer a lower AUM. Even small-cap fund managers desire a low AUM.

Small-Cap Funds

After a certain point, small-cap funds tend to limit cash inflows. A well-known example is the DSP BlackRock Micro Cap Fund. This normally happens when a mutual fund’s assets exceed a certain threshold. If the fund becomes a major shareholder in a company, it may find it difficult to trade its shares when the market is volatile. This is why small-cap funds prefer to invest through SIPs rather than lump sums.

Impact of high AUM on mutual funds

In general, mutual fund performance is unaffected by the size of the fund or the amount of money it manages. There is no general rule that governs a mutual fund’s behavior as its AUM grows. With more assets under management, different types of mutual funds behave differently.

The skillset of the fund manager, who manages the money by making the appropriate judgments at the right moment of entering or departing a mutual fund, is a big contribution to the fund’s performance. A fund manager is a specialist who, through his expertise, steers the fund and manages to deliver positive returns even when markets are volatile.

How to calculate AUM

Assets under the management formula are calculated in a variety of ways by fund companies. When a fund continuously generates good returns, its entire investment will rise. Positive results can attract new assets and investors, resulting in a higher AUM.

Similarly, a drop in the market value or investment performance can reduce the value of the assets. The same is true if the fund closes unexpectedly or if an investor redeems his or her stake. Capital invested across the company’s goods is included in assets under management, as are the shares of the company’s executives.

Effect of AUM on expense ratio or fee

Every fund house charges a management fee that is proportional to the size of the fund. It is a flat fee for the entire fund; investors are charged based on the number of units they own. The performance of the fund has no bearing on the fees. It just covers administrative costs and determines the asset manager’s remuneration. The Total Expense Ratio (TER) is a measure of a mutual fund’s annual operating costs. The AUM must always be greater than the TER, according to SEBI.

AUM and market movements

Market changes have a significant impact on the assets under control. The assets of the fund will climb when it produces profits and decline when it loses money. The mutual fund fee is also determined by this. Inferior expenses are usually associated with a lower value. Assume that 100 investors have deposited Rs.10,000 in a mutual fund that has returned 10%. The fund’s total assets under management (AUM) would then be Rs.11,000. After all, is said and done, companies employ several methodologies to determine the worth of the assets they manage.

In a nutshell, AUM is a great tool to gauge the popularity and success of a fund. However, it should have no bearing on your decision to invest or not. You can always invest with Invest Yadnya if comparing these measures seems too difficult. To meet a wide range of investment demands, we’ve chosen the best-performing portfolios.

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