When it comes to investing in mutual funds, does the size of the fund or AUM matter? For those new to mutual funds, AUM full form is Assets Under Management. Let us dwell some more on the importance of AUM since knowing AUM full form is not enough.
What is AUM?
AUM in mutual fund could refer to the total amount of money being managed by the fund house or Asset Management Company (AMC). Or it could refer to the value of investments in a specific mutual fund scheme. Either way, it indicates the size of the corpus created with a pool of investors’ money. However, for investors considering a particular mutual fund investment, AUM meaning in mutual fund is associated with any scheme’s AUM.
What determines AUM?
The AUM in mutual fund schemes are determined by the inflows of investor money, redemptions, and the changes in value of existing investments. Thus, on any given day, there would be fresh investor money flowing into a scheme even as redemption takes place. The same fund’s investments will appreciate or decline according to fund’s investment performance along with that of its respective asset class.
What is AUM in mutual fund?
For a mutual fund scheme, the AUM is the scheme’s Net Asset Value (NAV) multiplied by the total number of outstanding units. AUMs change daily but as part of mandatory disclosures they are disclosed only on a monthly basis in the fund factsheet available on the fund’s website besides online investment platforms.
What Mutual Fund AUM May Indicate to Investors
Credibility
A large AUM typically indicates a well-established fund and can be used as an additional factor for consideration while investing in a fund. This is apart from key factors like fund performance consistency, risk, and fit with financial goals.
Track record
A well performing fund can also lead to higher AUM, which in turn may attract new investors, further increasing the AUM.
Impact on costs
Mutual funds must mandatorily follow a tiered structure of expenses charged to investors for their services. The expenses charged by a mutual fund as indicated by the expense ratio is a percentage of AUM. It progressively decreases with rise in the AUM. Thus, for large funds significantly beating benchmarks, greater part of fund’s growth benefits investors.
Impact on fund’s investments
The impact of large AUM can be different for different fund categories. AUM size can be an important factor when looking at funds within a market capitalisation, as in the case of certain equity funds. In case of small cap funds, as AUMs rise, fund managers typically find it difficult to identify new investment candidates due to their limited pool. By enhancing existing investments and increasing ownership in companies, they risk getting into restrictions on trading of shares which impacts their liquidity for meeting investor redemptions. This is the reason why such funds typically stop fresh inflows from time to time.
This is not a problem with large cap and mid cap funds who typically have greater choices. At the same time, equity funds with large AUMs get to better tap investment opportunities like Initial Public Offerings (IPOs) and have better corporate access for their investment research.
In case of debt funds, large AUMs not only help in easier absorption of expenses but also give the funds better negotiating position for rates from issuers of debt securities. Both these factors can play a role in improving returns.
Liquidity and resilience
Despite risk management processes in mutual funds, still they are subject to different market risks. A large AUM does provide a sense of comfort to investors that the fund can meet liquidity needs can withstand extreme market conditions.
How Investor Can Use AUM Information
While considering a mutual fund investment, investors need to first account for performance over different time periods such as over 1, 3 and 5 years with respect to scheme benchmarks and peers. Along with performance, risk and fit with financial goals also needs to be considered. Information on AUM can be part of examination of other measures that can provide additional comfort. These include expense ratio, fund manager, and AMC reputation.
FAQs
Are funds with larger AUMs have potential for superior performance that those with smaller AUMs?
AUM size does not play a role in actively managed fund’s performance since it significantly depends on fund manager’s capability. Many funds with lower AUMs have been found to have performed better due to their nimble footedness in exploiting market opportunities.
Can a larger AUM in passively managed funds such as an Exchange Traded Fund (ETF) or an index fund with larger AUM make a difference?
For ETFs, larger AUMs means more units being traded and higher liquidity that is helpful for meeting redemptions. Maximum base expense ratio for passive funds is capped at 0.90% of AUM. This means that on account of lower costs compared to actively managed funds, a larger part of the growth of the investment reaches investors.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.