It is a common habit for most investors to focus on past returns while choosing the right mutual fund. Returns indeed are important, but there are other financial metrics too; these metrics offer a deeper insight into the health and potential of a fund. One of such metrics is Assets under management (AUM).
Key Takeaways
- Mutual funds collect money from investors and invest it in things like stocks and bonds.
- Assets Under Management (AUM) is the total market value of all investments a mutual fund manages on behalf of its investors.
- AUM tells you how much total money a mutual fund manages.
- Higher AUM usually means more investor trust and fund popularity.
- AUM is calculated daily by adding the value of all assets in the fund.
- AUM increases when:
- Market value (NAV) of holdings rises.
- New investors invest in the fund.
- AUM decreases when:
- Market value falls.
- Investors withdraw their money.
- AUM helps you judge the size, stability, and popularity of a fund.
- AUM can affect:
- Liquidity (how easily the fund handles large transactions).
- Expense ratio (cost of managing the fund).
A Quick Look at Mutual Funds and Their Structure
A mutual fund is a professionally managed investment vehicle; this vehicle pools the money from different investors for investing in a diversified portfolio of assets, these assets are such as stocks, bonds, and other securities.
The structure of a mutual fund involves the following key entities:
- Investors: Individuals or institutions that contribute capital.
- Fund Manager: A professional responsible for managing the fund’s portfolio based on specific investment objectives.
- Asset Management Company (AMC): The company that operates the mutual fund and employs the fund manager.
- Trustee: A governing body that ensures the mutual fund is managed in accordance with regulations and investor interests.
What Is AUM and Why Is It Important?
Assets Under Management (AUM)
In simple words, AUM, The Assets under management, shows how much money the fund has gathered from the investors. It is the total market value of the investments that a mutual fund manages on behalf of its investors.
Here’s why AUM is a crucial indicator for any investor:
- Investor Confidence: A large AUM often means that investors have trust and confidence in the fund and its management team.
- Liquidity and Stability: Funds with higher AUMs tend to be more liquid and stable. They can handle large redemptions without significant disruption.
- Cost Efficiency: Larger funds often benefit from economies of scale. This can lead to lower expense ratios, meaning a smaller portion of your returns goes toward management fees.
- Performance Context: While AUM alone doesn’t determine performance, it helps evaluate how the fund has managed to grow its capital base over time, which may suggest consistency and reliability.
- Market Perception: High AUM funds are often considered more credible and are more closely tracked by analysts and the market.
Who calculates the AUM? How frequently does the AUM fluctuate?
The AUM is calculated by the mutual fund company. This adds up the current market value of all the investments that are held in the fund. The market prices keep changing daily, so the AUM is updated regularly, mostly at the end of each trading day.
How is the AUM calculated?
AUM is calculated by adding the total market value of all the investments a fund holds. It includes stocks, bonds, cash, and other assets. As the value of these investments changes daily, the AUM also changes.
Let’s say a mutual fund holds the following:
- ₹50 crore in stocks
- ₹20 crore in bonds
- ₹5 crore in cash
The total AUM is ₹50 crore + ₹20 crore + ₹5 crore = ₹75 crore
If the stock market goes up and the value of stocks increases to ₹55 crore, the new AUM becomes:
₹55 crore + ₹20 crore + ₹5 crore = ₹80 crore
So, the AUM changes as the value of the fund’s investments goes up or down.
The impact of NAV (Net asset value) and new investment on AUM
AUM increases when the NAV goes up, as it means the value of the fund’s holdings has grown. It also rises when new investors add money to the fund.
If the NAV drops or investors withdraw funds, the AUM decreases.
So, AUM is affected by both market performance (NAV) and investor inflows or outflows.
AUM increases when the NAV goes up; this means that the value of the fund’s holdings has grown. It also rises when new investors add money to the fund.
This table will help you understand the use case of AUM and NAV
| Aspect | AUM (Assets Under Management) | NAV (Net Asset Value) |
| Meaning | Total value of all assets managed by the fund | Price per unit of the mutual fund |
| Use Case | To assess fund size and popularity | To determine how many units your money will buy |
| Performance Insight | Shows fund growth and investor trust over time | Shows daily performance and fund value changes |
| Updated | Periodically (daily/weekly/monthly, depending on fund) | Daily, based on market closing prices |
| Investor Relevance | Helps compare fund scale across options | Helps evaluate returns and investment cost |
Why AUM Matters to Investors
- Indicator of fund size and popularity
A higher AUM often means investor trust and long-term performance. - Liquidity and scalability considerations
Larger AUM funds can handle big debts more easily and scale operations easily - Impact on fund expense ratio and fees
Funds with higher AUM can spread costs over more assets. This decreases the expense ratios
Is a Higher AUM Always Better?
- Pros of high AUM
Has greater stability, better liquidity, and often results in a lower expense ratio; this is because of the economies of scale. - Cons of high AUM
In categories like small-cap or mid-cap funds, very high AUM can lead to difficulty in deploying capital efficiently, possibly reducing returns.
Context matters.
AUM should be evaluated based on the fund type. What’s ideal for a large-cap fund may not suit a focused or small-cap strategy.
AUM Classification by Fund Type
Equity Mutual Funds
AUM presents the market performance and investor interest. High AUM depicts that there is strong performance, especially in large-cap funds.
Debt Mutual Funds
AUM helps the assessment of liquidity and credit exposure. Larger AUM generally allows better diversification and stability.
Hybrid Funds
AUM portrays the balance between equity and debt. Useful for judging how risk-averse the fund is and thus garnering investor confidence.
Index and ETF Funds
AUM is a key indicator of tracking efficiency and liquidity. Higher AUM usually means lower tracking error and better market representation.
Role of AUM in Fund Performance
- Does a growing AUM lead to better returns?
Not always. While growth in AUM may reflect investor confidence, it doesn’t guarantee higher returns, especially in actively managed funds. - Historical data on AUM vs returns correlation
Studies show mixed results. Some funds maintain performance with growing AUM, but others, mostly in small-cap or focused categories, may see returns decline as capital becomes harder to deploy efficiently. - Limitations of using AUM as a performance metric
AUM only shows size, not skill. High AUM doesn’t reflect how well the fund manager allocates capital or handles market volatility.
How Fund Managers Handle Large AUM
- Issues of managing huge funds
Inception of huge amounts of capital can be challenging, particularly in less liquid portions such as small-cap equities.
- Habits to ensure liquidity
Allocation may be raised in highly traded securities, a cash reserve can be maintained, or investments can be staggered to avoid market impact.
- Function of fund diversification and portfolio rebalancing
Diversification by sectors and rebalancing on time assist in managing risk, securing liquidity, and keeping pace with the fund’s goal.
Comparing Mutual Funds Based on AUM
- When comparing funds of the same category
AUM would be useful in determining the funds that are capable of bringing in more investors or are more stable, particularly within the same type of risk and strategy.
- Applying AUM in screening criteria
Most investment platforms provide for filtering funds by a minimum or maximum AUM to narrow down options to your choice.
- AUM is one of multiple comparative metrics
AUM is helpful but needs to be viewed in conjunction with returns, expense ratio, risk measures, and fund manager track record for a sound assessment.
What Investors Should Know About AUM
- What investors should know about AUM?
AUM shows the total money managed by a fund, reflecting its scale, investor confidence, and sometimes, operational efficiency. - When to use AUM in decision-making
Use AUM to assess fund size when comparing similar funds, evaluating liquidity, or choosing between new vs. established schemes. - Red flags and green lights based on AUM
Very low AUM in an old fund may signal poor performance or low trust. Rapid AUM growth in a small-cap fund may raise deployment challenges. On the other hand, steady AUM growth in line with performance is a healthy sign.
Frequently Asked Questions (FAQs)
Indirectly, yes. But it very large AUM in certain fund types can make it harder for fund managers to find high-return opportunities.
Not always. Yes, it can indicate trust and stability, but it may also limit flexibility in small- or mid-cap funds.
AUM (Assets Under Management) is the total market value of all assets a fund manages for the investors
You can find it on fund house websites, investment platforms, or financial news portals.
Yes, it helps you choose established funds with consistent inflows and investor confidence.
AUM is the total value of assets managed; NAV is the per-unit price of the fund.
It shows the fund’s size, popularity, and ability to manage investor money effectively.
It may indicate positive fund performance or rising investor interest, but it can also pose management challenges in certain categories.
Because it offers insights into the fund’s popularity, stability, and ability to weather market volatility.
They can be, due to lower liquidity and lack of investor backing—but they may also offer higher growth potential in some cases.
IDCW vs. Growth Mutual Funds—Which is Right for You?
Are you Confused between IDCW (Income Distribution cum Capital Withdrawal) and Growth mutual fund options?
This guide breaks down the pros, cons, tax implications, and when to choose which, it is written in a beginner-friendly language that makes it easier for the reader to grasp the concept.
Here you will learn to:
- Learn how your returns are affected
- Discover tax-saving opportunities
- Decide smartly based on your financial goals
If you’re investing in mutual funds, this is a must-read before making your next move!
Read now: https://stofiniq.com/how-to-choose-right-idcw-vs-growth-mutual-fund/
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