Financial term of the week- Asset Under Management (AUM)
The Asset Under Management (AUM) in mutual funds is the sum total of all the assets/capital that a particular scheme holds. In other words, it includes the money invested by investors and the earnings from those investments made due to the fund manager’s investing strategies.
Hence, if 100 investors invest Rs 1000 each in a mutual fund scheme, then the AUM of the scheme shall be Rs 1,00,000 (100x1000).
How does the AUM change?
The reasons for an increase in a scheme’s AUM can be-
- New investors make investments in the fund
- Existing investors make additional investments in the fund
- The AUM appreciates due to the fund manager’s investment strategy
The opposite is also equally true. If the AUM of a fund can increase, it might decrease as well.
What is the significance of AUM in choosing mutual funds?
Comparing the AUM of two mutual funds with different investment strategies is like comparing apples with oranges. Just because a mutual fund scheme has been invested in more than the other does not mean that it is a good scheme. It may not be a good scheme for your portfolio, keeping your risk appetite or life goals in mind or it may not have had an excellent performance track record. No research has till now proven a theory that relates the size of a fund to its performance directly. As an investor, it ideally should not matter whether a fund's size is Rs 10,000 Cr or Rs 1000 Cr, so long as it fits into your financial planning.
Does this mean that the size of the fund has no significance? Not really. It may imply different things for different asset classes-
For Equity mutual fund schemes (excluding small-cap)
You may not want to consider AUM as one of the prime factors while choosing an ideal equity scheme. A higher AUM may mean that the scheme is perhaps popular or that it has been around for a while; but again, its performance is mostly all the conviction you may need.
(Past performance may or may not be sustained in future and the same may not necessarily provide the basis for comparison with other investment)
For small-cap equity mutual fund schemes
The size may sometimes work as a double-edged sword for small-cap schemes, which may result in restricted inflows. Liquidity of investment is one of the vital characteristics for the fund manager of a small-cap mutual fund, because quick decisions regarding positions may be the need of the hour. It is typically avoided to buy huge stakes in small-cap companies, to avoid immobility of the fund's stake, which eventually may lead to inflow restriction. Hence, for a small-cap scheme, you may consider SIP* as the method of investment as it allows you to invest over a period of time and helps to mitigate any such restriction about fund size and help maintain a long-term view of your investment.
*SIP stands for Systematic Investment Plan wherein you can regularly invest a fixed amount at periodical intervals and aim for better benefits over a period through the power of compounding.
For debt mutual fund schemes
It is advisable to avoid minimal AUM debt schemes and huge AUM ones. Large debt schemes may be able to negotiate better rates with the debt issuers, but if they are faced with huge redemption requests, it may pose a problem. On the other hand, minimal AUM debt schemes may have a relatively higher expense ratio.
Having said this, the Indian mutual funds market may be relatively a bit young to be able to identify a trend relating the size of a fund to your investment favourability in it. At any given point, you may want to accord more importance to a fund's performance than to its size. Moreover, you should also consider your financial goal and risk taking ability before investing.
(Past performance may or may not sustain in the future and the same may not necessarily provide the basis for comparison with other investment)
You can seek advice from your mutual fund distributor for any investment suggestions.