When choosing a mutual fund, there are a multitude of different factors and metrics to assess before you invest. For instance, many look at the scheme’s returns, past performance, minimum investment amount, risk tolerance, etc.
Another crucial factor that helps you evaluate the performance of a fund or an Asset Management Company (AMC) is the Assets Under Management (AUM).
AUM refers to the total cumulative amount that has been invested in the fund. It includes the total invested corpus and the capital.
The fund managers decide on the allocation of AUM on behalf of the investors. The fund managers employ different investment strategies to gain desired returns while sticking to the fund’s financial objective.
Higher AUM indicates better investment inflow, quality, and management experience. However, in the case of equity mutual funds, they do not always guarantee returns.
AMCs employ different strategies to evaluate the total value accumulation of assets or AUM in mutual funds. If the market conditions are favourable, a fund may experience capital appreciation, and potentially increase the AUM.
The higher returns could attract more investors who may be willing to invest in the fund and, subsequently, push the AUM higher. However, below-average performance, fund closure, and reduced investor in-flows could lower the AUM in mutual funds.
Investment companies use AUM as a marketing tool to attract new investors to a particular scheme. Investors, on the other hand, use AUM to determine the volume of a company’s operations compared to its competitors.
Funds with higher AUMs have higher market trading volumes making them more liquid. It means that investors can buy mutual fund units or redeem them without any hassle.
Simply put, the performance of the fund may not dwindle even if a few large investors redeem their invested sums. Note that the Assets Under Management in any fund constantly fluctuate because of market fluctuations.
If the market conditions improve, the total AUM of the mutual fund could rise. However, if the market is bearish, the total value of assets managed could witness a fall.
In addition, investors continue to infuse more funds or withdraw their invested amount, which also leads to fluctuations in the total AUM under any fund.
While tracking AUM is a good idea, it shouldn’t be the only factor you consider when choosing a mutual fund. You should consider comparing other factors and assess funds that align with your goals. On Bajaj Markets, investing in mutual funds is easy and you can get started in just a few clicks.
FAQs
Should I consider AUM before investing in equity and debt mutual funds?
If you are investing in equity mutual funds, the consistency of high returns and whether the fund sticks to its financial objective is more crucial than AUM. The returns offered by an equity-based mutual fund depend on the fund manager’s ability to generate returns.
However, for investment in debt security, Assets Under Management is an essential factor that requires your attention. Higher capital in a debt fund facilitates lowering the expense ratio applicable to each individual and, consequently, increases the returns.
How does AUM impact the expense ratio of a mutual fund?
Each fund house or AMC levies a fee, called the management fee, proportion to the size of the fund. Simply put, it is applicable at a fixed rate on the entire corpus available under the fund.
This fee is charged based on the number of units held by an investor and is used for operating the fund. The Total Expense Ratio (TER) is the annual cost of operating a fund. The SEBI has mandated that TER must always be below Assets Under Management.
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