If we consider the stock market, it is said that when the price is high, don’t buy, but when it comes to mutual funds, don’t buy it if the AUM (Assets under management) is high. The market value of the assets a financial institution has discretion over is referred to as assets under management. For brokerages, mutual funds, financial advisor firms, etc., increasing AUM is the primary goal, and all of them will use a high AUM as a selling point while marketing themselves to potential buyers.
What is Assets under Management (AUM)?
What is Assets under Management (AUM)?
The overall market value of assets/capital that mutual funds hold are the Assets under management (AUM). Basically, the fund manager monitors and manages these assets and makes all the investment-related decisions for the investors. AUM work as an indicator of the size and success of a given fund house. Comparing a fund’s assets under management in various performances and timelines with other schemes is quite easy. The AUM value also comprises the returns that a mutual fund earns.
What should you consider before investing in AUM?
Often, investors who want to invest in mutual funds look at the fund’s AUM, and if it is on the higher side, then they wouldn’t think much before investing. Moreover, there are various reasons why AUM should be a significant factor while choosing a fund. Let’s see how AUM impacts different fund types:
Why is AUM Important?
Since the assets under management define the success and size of the company, it is crucial that investors consider them before investing. AUM’s value comprises of the returns that a mutual fund earns. A higher AUM means the fund is doing well, and the investor can consider it. However, AUM can not be the only factor in deciding whether to invest in a fund or not, other factors, such as expense ratio, Fund managers’ previous years’ returns, etc., should also be concerned. Also Read: 10 Best Mutual Fund Apps to Invest Online in India (2020)
How to Calculate Assets under Management (AUM)?
Fund houses use various methods to calculate the ‘assets under management’ of a company. If the fund is giving positive returns, then the overall investment made in the fund will increase, which will lead to an increase in the number of investors in the fund; therefore, increasing the assets under management. Just like that, if the fund is constantly giving negative returns, then it will lead to the fall in ‘assets under management’ of the company. Similarly, if the investor redeems his or her share, or if the fund closes unexpectedly, the value of the fund will decrease. The shares held by the company’s executives are also included in the Assets under management. However, you should know that the value of assets under management never remains constant. It changes based on the flow of investor money in and out of the fund. The investor’s inflows, capital appreciation, and reinvested dividends also positively affect the AUM of the funds.
Assets under management and market fluctuation:
Assets under management are considerably affected by market fluctuations. The fund’s assets will fall when it incurs a loss and rise when it earns returns. It also distinguishes the mutual fund fee. Generally, lesser value means lower costs. For example, let’s say around 100 investors have cumulatively invested INR 10,000 in a mutual fund that has earned 10% returns, then the fund’s AUM would be INR 11,000. Moreover, methods that companies use to calculate the value of Assets they manage. In a nutshell, AUM is the best way to assess a fund’s performance and popularity, but it shouldn’t influence your decision to invest or not.
NAV Vs. AUM
Both AUM and NAV are two completely different things. Net Asset Value(NAV): It is the value per unit. Whenever an investor invests a certain amount of money in mutual funds, the AMC allot units that are equivalent to the invested amount. For instance, An investor invests INR 10,000, and at that time, the NAV of the scheme is 20, then the investor will receive 500 units. NAV is defined as the difference in the total value of the liabilities taken and assets held on by the scheme wholly divided by the total number of outstanding units. AUM or Asset under management: The overall market value of assets/capital that mutual funds hold are the Assets under management. In simple words, mutual funds create a pool of funds from the amount invested by multiple investors, and this pool of funds is known as the AUM of a particular scheme. For instance, AN investor invests 50 lakhs in a scheme, as a result of this, the AUM also increases by the same amount that is 50 lakhs. Therefore, the AUM of a scheme is simply the total amount of assets managed by the mutual funds. Also Read: 10 Best Long Term Investment Options in India
