Understanding Assets Under Management (AUM) for a Mutual Fund Scheme

In the world of mutual funds, the term Assets Under Management (AUM) plays a pivotal role in understanding the scale and performance, of a mutual fund scheme. AUM refers to the total value of the assets managed by a mutual fund scheme at any given point in time. It is one of the metrics used by many investors, asset management companies and analysts to gauge the size and growth of a fund.

What is AUM?

The Assets Under Management is the sum of all investments made by investors in a mutual fund scheme. Essentially, it represents the total size of the mutual fund's portfolio. This amount can be calculated by multiplying the mutual fund's Net Asset Value (NAV) per unit by the total number of units outstanding.

The formula to calculate AUM is:

AUM=NAV × Total Units Outstanding

Where:

• NAV is the price per unit of the mutual fund, which fluctuates based on the performance of the assets held by the scheme.
• Total Units Outstanding refers to the number of units issued by the scheme, which is influenced by the amount of money invested by all unit holders.

Role of AUM in Assessing Mutual Fund Companies

AUM is one of the metrics used to assess the relative size of mutual fund companies or asset management companies (AMCs). AUM alone does not reflect the performance of a mutual fund or its suitability for specific investment goals. It is essential to consider other factors like the fund’s investment philosophy, fund’s expense ratio, historical returns, and management team in conjunction with AUM.

AUM Changes Over Time: Factors at Play

1. Initial Mobilization:

When a mutual fund scheme is first launched, the AUM is equivalent to the amount of money mobilized from investors during the New Fund Offer (NFO). The AUM at the time of launch gives an indication of the level of investor interest in the scheme.

2. Profitability Impact:

The AUM can change due to the performance of the scheme. If the mutual fund scheme yields positive returns, its AUM tends to increase because the value of the underlying assets rises. Conversely, if the fund generates negative returns, the AUM can decrease as the value of the assets drops.

3. New Investments:

Additional investments after NFO by investors contributes directly to the growth of the AUM. This is with reference to an open-ended mutual fund scheme where investors can purchase additional units at any time after scheme re-opens post NFO.

4. Redemptions and Payouts:

AUM can also decrease if investors redeem their investments, or the scheme pays out dividends to unit holders. These outflows can result in a lower AUM, reflecting a reduction in the fund's size.

Conclusion

In summary, AUM is an investor metric that offers insights however it is also important to understand other critical factors like fund’s investment philosophy, fund’s expense ratio, historical returns, and management in-order to make informed investment decisions and choose the right mutual fund.

Above article is authored by Quantum.

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