Introduction

AUM stands for assets under management, while AMC stands for asset management company. An AMC or fund house is a company that manages investments on behalf of investors. The total value of assets managed by the AMC on behalf of its investors is known as the total AUM managed by the company.

In the upcoming sections, we will discuss the key features of mutual fund AUM. This will include its full form, meaning, calculation method, and its potential impact on mutual fund returns.

What is AUM’s Full Form and Definition?

AUM stands for Assets Under Management, which refers to the total market value of all investments held by a mutual fund in its portfolio, including stocks, bonds, money market instruments, cash, and cash equivalents. As the value of these mutual fund investments changes whenever securities are traded on equity, bond, or money markets, the AUM of a mutual fund is liable to change in real time.

The value of stocks and bonds can fluctuate throughout the day, but the calculation of assets under management (AUM) for a mutual fund is only done at the end of each trading day. This means that the AUM of a mutual fund will only change once per day, based on the closing price of the investments held in its portfolio.

How is AUM in Mutual Funds Calculated?

For financial institutions and investment organizations, calculating AUM is a critical step in figuring out the entire value of the assets they oversee on behalf of their clients. AUM (assets under management) is crucial in understanding the size and performance of financial institutions. For example, a mutual fund buying 10 shares of Company ‘ABC’ at Rs.200 each on March 31, 2022, helps explain AUM calculation in mutual funds.

So, the initial investment by the mutual fund is Rs. 2000 on 31 March 2022.

Say, on 31st March 2023, at the time of market closing, the price of each share increased to Rs. 300. So, the market value of the 10 shares held by the mutual fund at the end of the trading day on 31 March 2023 will be Rs. 3000.

It has been stated that since the mutual fund has only made one investment, the total assets under management (AUM) of the scheme will be Rs. 3000 on 31 March 2023. However, it is important to keep in mind that in reality, mutual funds can hold hundreds and thousands of stocks and bonds from various companies in their portfolio. As a result, their AUM can easily reach crores. Despite this, the AUM calculation formula remains the same and can be represented as:

AUM = (Market value of Instrument at the End of the Trading Day) + (Cash Holdings / Sale proceeds) + (Fund Inflows) – (Redemption Outflows) – (Dividend Pay-outs)

The formula mentioned above considers different inflows and outflows of capital in a mutual fund portfolio to determine the Asset Under Management (AUM) value of the fund. This AUM value is then utilized to calculate the Net Asset Value (NAV) of the Mutual Fund.

Factors Influencing AUM in Mutual Funds

Based on the above formula for calculating AUM in mutual funds, 5 key factors can influence the assets under management of a fund. These are:

1. Performance of Investments:

If the investments of a mutual fund perform well, the market value of the investments in the scheme’s portfolio increases. This leads to an increase in the value of the investments and the assets under management of the mutual fund increases. Similarly, if the investments perform poorly, their value will decrease and lead to a reduction in AUM.

2. Sales Proceeds:

If the sale of existing investments in the mutual fund occurs at a price that is higher than the original investment, it will have a positive impact on the AUM of the fund. On the other hand, if existing investments are sold at a loss, the AUM of the scheme will decrease.

3. Fund Inflows:

New inflows from investors into a mutual fund initially show up as cash holdings of the scheme. This increases the assets under management of the fund.

4. Redemption Payouts:

Redemption outflows or payouts are made when existing investors redeem their mutual fund units. These payouts decrease the cash holdings of the fund and result in a decline in AUM.

5. Dividend Payouts:

When a mutual fund payout declares dividends, the amount is paid out from the available profits of the scheme. This decreases the value of holdings of the fund and leads to a decline in the mutual fund’s assets under management.

What is the relationship between the Assets Under Management (AUM) of a mutual fund and the fees charged by it?

The expense ratio is the fee a mutual fund provider charges for its services. The expense ratio includes both the operational expenses and the management fees. These are reliant on the fund’s overall size. AUM is a significant factor that determines the fee charged by a mutual fund provider. As the AUM of a mutual fund increases, the fee charged by the fund house decreases, as the cost of managing the fund gets distributed over a larger pool of assets. Conversely, if the AUM of the mutual fund decreases, the expense ratio of the fund goes up.