Mutual funds’ AUM (Assets under Management) is one of the main indicators in the investment industry, it represents the overall market value of assets that a mutual fund manages on behalf of its investors. Now, let us take a deep dive into the relevance of MF AUM, how it is calculated, and what its meaning is for the investors.
What is Asset Under Management (AUM)?
Asset Under Management (AUM) is the total market value of all the assets (securities, cash, etc.) that a mutual fund manager. It is a key indicator of a fund’s size, liquidity, and popularity among investors. AUM is calculated daily based on the closing market value of all the fund’s assets.
Importance of AUM in Mutual Funds
1. Scale and Stability
• AUM is a measure of how big and stable a mutual fund
• Larger funds usually have a big pool of assets that are under their management, and this may often be the case with funds that are considered to be more stable and reputable.
2. Liquidity
• Increased AUM above all improves liquidity.
• More money funds obtain more assets that allow to more readily buy and sell securities even in a period of market turbulence.
3. Performance Benchmark
• AUM can be a yardstick for the industry benchmarking.
• Funds that maintain consistently high AUM may be more amenable to investors for it could imply robust performance and the investors’ consensus.
Impact of High AUM on Mutual Funds
1. Economies of Scale
• Larger funds have the ability to benefit from scale economics through which expense ratios will be reduced for the investors.
• However, as this fund grows its fixed costs of managing the fund are spread across a larger asset base reducing the average cost per investor.
2. Increased Buying Power
• Funds that are big enough to have high AUM can have a strong buying power enabling them to buy more securities.
• It can also result in the better diversification and consequently, the stock index may yield higher returns to the investors.
3. Market Influence
• Higher AUM funds might impact more the market.
• The bidding and selling activities of the investors could greatly affect the price of securities particularly in low liquidity markets.
Calculation of AUM
The AUM as well as mutual funds is calculated by taking the sum of the market values of all securities and assets that are under the fund’s control. Next, the AUM could be subject to deduction for any debts, e.g., remaining costs or fees. Such calculation is normally conducted on a daily basis to consider adjustments of the fund’s assets to current market conditions
AUM and Expense Ratio
AUM is one of the main factors that affects the expense ratio of a mutual fund. Expense ratio is the portion of a fund’s assets that is used to pay the fund’s operating costs. Normally, funds with larger AUM have lower expense ratio because of economies of scale. This implies that the investors in large AUM funds go with the low fees in contrast to the investors of smaller funds.
Difference Between AUM and NAV
The NAV (Net Asset Value) and AUM (Asset Under Management) are similar but different in meaning. AUM is, therefore, the product of the value of the assets of a fund, whereas NAV is the per-unit value of the fund’s assets. The NAV is calculated through dividing the total value of a fund’s assets by the outstanding units in existence. While AUM represents the fund`s size and scale of operations as a whole, NAV represents the value of every unit in the fund.
Conclusion
Mutual Fund AUM is a critical metric that provides valuable insights into a fund’s size, scale, and performance. By understanding Mutual Fund AUM, investors can make informed decisions and navigate the complexities of the financial markets more effectively.
FAQs
Q: How is Mutual Fund AUM calculated?
A: Mutual Fund AUM is calculated by adding the market value of all the fund’s assets and adjusting for liabilities.
Q: What factors can impact Mutual Fund AUM?
A: Factors such as market performance, investor inflows and outflows, and fund performance can impact Mutual Fund AUM.
Q: How should investors interpret changes in Mutual Fund AUM?
A: Investors should consider changes in AUM along with other factors such as fund performance and market conditions to make informed decisions.
Disclaimer: This blog has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this blog are as on date. The blog does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
The sector mentioned herein are for general assesment purpose only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. Past performance may or may not be sustained in future.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully
