Before investing in a mutual fund scheme, investors should check its AUM. But what does AUM mean? Read this post to find out.
If you're looking for factors you should consider before investing in mutual funds, AUM deserves your attention. AUM's full form is Assets Under Management. Also known as the size of the fund, it represents the total market value of all the investments made by the scheme.
Here’s a detailed explanation of what AUM is, how it is calculated, and more-
What is AUM or Asset Under Management?
Depending on your mutual fund scheme, the investments can be made in equities, bonds, and other instruments. The market value of all the investments made by a scheme is its AUM. As the market value of the securities held by the scheme fluctuates, so does its AUM.
For instance, if 1,000 investors invest â‚ą1 lakh each in a mutual fund scheme and it generates 10% returns, the AUM of the scheme will be â‚ą11 crores (â‚ą10 crores invested amount + â‚ą1 crore returns). Similarly, if the scheme delivered a loss of 10%, the AUM will be â‚ą9 crores (â‚ą10 crores invested amount - â‚ą1 crore loss).
How Do Higher AUMs Impact Mutual Funds?
The importance of AUM in mutual funds is a commonly debated topic. It is generally believed that a scheme with a higher AUM can deliver potentially higher returns. However, this is not entirely true as it depends on the type of mutual fund you choose. For instance, when we talk about equity funds, the AUM is not as important as the performance consistency of the scheme.
But when it comes to debt funds, AUM is a vital consideration. It is easier for a debt fund with a higher AUM to spread the expenses among a larger investor group. This helps in minimizing the fixed scheme expenses and deliver potentially higher returns.
What is the Relation Between AUM and Expense Ratio?
Now that you know the AUM meaning, it is also important to understand its impact on a scheme’s expense ratio. TER (Total Expense Ratio) is a management fee charged by the fund house. According to SEBI regulations, fund houses must charge the TER according to the scheme’s AUM.
The current TER limits are as follows-
AUM |
TER for Equity Mutual Funds |
TER for Debt Mutual Funds |
First â‚ą500 crores |
2.25% |
2.00% |
Next â‚ą250 crores |
2.00% |
1.75% |
Next 1,250 crores |
1.75% |
1.50% |
Next 3,000 crores |
1.60% |
1.35% |
Next 5,000 crores |
1.50% |
1.25% |
Next 40,000 crores |
TER reduced by 0.05% for every â‚ą5,000 crores rise in AUM |
TER reduced by 0.05% for every â‚ą5,000 crores rise in AUM |
Above â‚ą50,000 crores |
1.05% |
0.80% |
How is AUM Calculated?
The basic formula to calculate the AUM is as follows-
Mutual Fund AUM = Scheme NAV (Net Asset Value) x Outstanding Scheme Units
For instance, if the NAV of a scheme is â‚ą100 and it has 1 lakh outstanding units, its AUM will be â‚ą1 crore.
However, it is worth noting that the NAV of a scheme can fluctuate daily depending on the price fluctuations of the securities held in the scheme. As a result, the AUM of the scheme also fluctuates daily. But fund houses only declare scheme AUMs every month. You can find the same in the scheme fact sheet and the official AMC website.
Is Higher or Lower AUM Scheme Better for Investment?
While very high or very low AUMs can impact the scheme's performance, there is no ideal AUM that can help you select a potentially better mutual fund scheme. Several schemes with lower AUMs deliver higher returns than those with higher AUMs.
So, the correct way to analyze a scheme’s AUM is by comparing it with other schemes from the same fund category. And while it is important to know what is AUM and how it works, ensure you also focus on factors like-
â—Ź Investment objective
â—Ź Risk appetite
â—Ź Investment horizon
â—Ź Scheme type
â—Ź TER
â—Ź Exit load
â—Ź Past performance
Don't Skip AUM When Analyzing Mutual Funds Schemes
Mutual fund schemes with larger AUMs are generally considered more trustworthy as they have higher investor participation. However, this does not mean that a scheme with a higher AUM will deliver better returns.
So, while you should check the scheme's AUM and compare it with others from the same fund category, avoid investing solely because it has a higher AUM. Give equal emphasis to all the above factors to make an informed decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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