If you are looking for things you should check before investing in mutual funds, you might have come across experts recommending investors to review the AUM of the scheme. What is this AUM? How is it calculated? Does the AUM impact the performance of a mutual fund? Read this post to find out.
When you invest in a mutual fund scheme, in a way, you give your money to professional fund managers so that they can invest on your behalf. So, the management team is responsible for managing and investing the investor's money. This total amount managed by a mutual fund scheme is known as its Asset Under Management (AUM). Take a look at what it is, how it is calculated, and its impact on the scheme.
As the name suggests, AUM or Assets Under Management is the total capital that a mutual fund scheme holds. The fund manager of the scheme is responsible for investing and managing this capital on individual investors' behalf. The AUM changes consistently based on the flow of funds.
Moreover, the AUM between two mutual fund schemes can vary significantly. While a scheme from a particular fund category might only have an AUM of a few hundred crores, a popular fund from the same category might have an AUM of thousands of crores.
Generally, the size of the AUM helps determine the success of the scheme and the fund house. Higher the AUM, the more successful is the AMC (Asset Management Scheme) as more investors trust the AMC with their money.
However, there is no guarantee that a mutual fund scheme with a higher AUM will deliver better returns over a similar scheme from the same fund category. A scheme with a lower AUM might offer better returns than a scheme with a higher AUM. With respect to AUM, let us look at how important is this factor in selecting a mutual fund:
As mentioned above, many equity funds with lower AUMs have performed better than the ones with higher AUM. Due to this, an investor should never solely rely on an investor should never solely rely on selecting a mutual fund scheme based on its AUM. Other factors like the reputation of the fund house, consistency in returns, fund managers' credibility, and expense ratio are some other factors that deserve your attention.
When selecting a debt fund, a higher AUM translates into a more granular distribution of fixed expenses across investors. This reduces the expense ratio of the fund. Moreover, funds with significant assets are in a better position to negotiate the rates with debt issuers. However, if the AUM of a debt fund is too large, it can pose a risk of redemption in case of a volatile condition.
There are different ways to calculate the AUM in a mutual fund. Generally, if a mutual fund scheme delivers consistent returns over a few years, its AUM grows considerably. This growth in AUM is natural as not only the wealth of the investors rises due to higher profits generated by the scheme but also because such consistent performers attract more new investors.
Similarly, the AUM falls if the scheme is unable to deliver expected returns. The wealth of existing investors falls, and a lot of them prefer exiting the plan, resulting in the fall of the total assets held by the scheme.
There is no thumb of rule suggesting that high or low AUM of a mutual fund scheme affects the performance of the scheme. For instance, an equity scheme with a high AUM might have significant exposure to a particular stock. In such cases, it is possible for the fund manager of the scheme to not be able to exit that stock as quickly as required.
But substantial Assets Under Management could also make it easier for the fund manager to enter and exit a particular stock in case an opportunity arrives. On the other hand, a scheme with a low AUM could be more flexible with regards to investing but might not have adequate funds to take quick advantage of available opportunities.
So, neither does a higher AUM suggests that the scheme has more potential, nor does lower AUM means that the scheme would be unable to deliver high returns. To confirm this, you can go through the list of top mutual fund schemes, and you will see considerable differences in the returns offered by the schemes with no direct relationship to their AUM.
Now that you know AUM meaning and how it is calculated, should you or should you not consider it while selecting a mutual fund scheme?
The simple answer is yes. You should check the AUM of the mutual fund scheme you are planning to invest in and compare the same with similar schemes from other fund houses. But it would be unwise to select a particular scheme just because it has a higher AUM. A fund with a higher AUM that also ticks all the other boxes with regards to your investment profile could be a great choice.