What is AUM in mutual funds, and how much does it matter?
Summary
AUM (Assets Under Management) represents the total market value of all investments a mutual fund manages. It indicates the fund’s size, popularity, and investor confidence, changing daily with market movements and investor activity. While higher AUM suggests stability and liquidity, it doesn’t guarantee better returns. Investors should view AUM as one factor among many—alongside performance, strategy, financial objectives, risk appetite and fund manager proficiency before investing.
Introduction
While you're researching mutual funds. Comparing different schemes. Reading factsheets carefully. One term appears everywhere: AUM.
Fund A has ₹5,000 crore AUM. Fund B handles ₹500 crore. Fund C shows ₹50,000 crore AUM.
What do these numbers actually mean? Should you prefer a higher AUM? Does lower AUM signal risk?
Most investors skip this detail entirely. They focus on returns, expense ratios, and fund manager reputation. All are important factors, certainly.
But AUM reveals something fundamental about the fund. Its scale. Its popularity. Its operational dynamics.
Let's break down what AUM actually means. How it's calculated. And most importantly, why it matters to your investment decisions.
What is AUM in Mutual Funds?
AUM stands for Assets Under Management. It represents the total market value of all assets a mutual fund currently manages.
Think of it as the fund's size measured in rupees.
What's Included in AUM?
A mutual fund invests in various securities. Equity funds buy stocks. Debt funds purchase bonds. Hybrid funds hold both.
AUM includes the current market value of everything the fund owns.
All stocks in the portfolio. All bonds held. All cash reserves. Every investment made using investor money.
Add up the current market value of all these holdings. That's the fund's AUM.
AUM is Dynamic, Not Static. AUM changes constantly. Daily, in fact.
When new investors put money into the fund, AUM increases. When existing investors redeem their units, AUM decreases.
When the stock market rises, equity fund AUM grows automatically. The same holdings become more valuable. When markets fall, AUM shrinks correspondingly.
AUM is a snapshot, not a fixed number.
What does a high/low AUM mean?
A larger AUM doesn't automatically mean better returns. A smaller AUM doesn't necessarily mean higher risk.
The number tells you about scale. About how much money the fund manager handles. About the fund's popularity and investor confidence.
But performance depends on many other factors. Fund manager capability. Investment strategy. Market conditions. Expense management.
How AUM is Calculated
Calculating AUM is straightforward. The formula is: AUM = NAV × Total Number of Outstanding Units
Two components determine the total. Let's understand each.
- Understanding NAV
NAV stands for Net Asset Value. It's the per-unit price of the mutual fund.
When you buy mutual fund units, you pay the NAV. When you redeem, you receive the NAV.
NAV changes daily based on the underlying portfolio's performance. Good day in markets? NAV rises. Bad day? NAV falls.
- Understanding Outstanding Units
This is simply the total number of units currently held by all investors combined. When new investors buy units, outstanding units increase. When investors redeem, outstanding units decrease.
Putting It Together: An Example
Let's calculate AUM for a hypothetical fund:
Given:
- Current NAV: ₹50 per unit
- Total outstanding units: 10,00,000 units
Calculation: AUM = ₹50 × 10,00,000 = ₹5,00,00,000 (₹5 crore)
What this means: The fund currently manages assets worth ₹5 crore on behalf of all its investors.
Why AUM Matters to Investors?
Here are some key reasons why AUM matters to the investors:
- Indicator of Trust and Popularity
Higher AUM generally indicates that more investors have put money into the fund. This suggests confidence and trust. Why do many investors prefer this fund over alternatives? These funds typically experience fewer sudden inflows/outflows, making them more stable during volatile markets.
- Large AUM shows collective investor confidence.
But remember—popularity doesn't guarantee future returns. Many investors could be wrong collectively. Past confidence doesn't ensure future performance. Still, AUM provides useful social proof. If thousands of investors trust their money with this fund, that's worth noting.
- Impact on Liquidity
Liquidity means how easily you can buy or sell fund units without affecting the price significantly. Larger AUM funds typically offer better liquidity. Why? Because there's more trading volume. More investors are transacting regularly. Your redemption is a small drop in a large bucket.
Redeeming ₹25 lakh from a ₹2,000 crore fund is just 0.00125% of AUM—practically invisible in daily flows.
But redeeming ₹25 lakh from a ₹50 crore fund withdraws 0.5% of the total AUM.
Even though the amount is identical, for a smaller fund, this proportion can be large enough to trigger selling underlying holdings, forming temporary pressure and operational adjustments.
Better liquidity means smoother entry and exit for investors. Less disruption to the fund's operations.
- Expense Ratio Implications
The expense ratio is what the fund charges for management and operations. It's expressed as a percentage of AUM. Funds with a larger AUM can spread their fixed administrative and operational costs (like salaries, research, and overhead) over a much wider base of assets. Funds with very low AUM often charge higher expense ratios.
Why? Because of operational costs. These costs are similar whether managing ₹100 crore or ₹1,000 crore.
A fund with ₹50 crore AUM charging 2% expense ratio collects ₹1 crore annually. A fund with ₹5,000 crore charging 1% collects ₹50 crore.
Should You Consider AUM Before Investing?
While AUM is an important factor, it shouldn’t be the only factor when choosing a mutual fund. Here’s what to consider:
- Large AUM funds: Typically stable, good liquidity, and lower risk, but may have slower growth potential.
- Small AUM funds: Can offer higher growth potential but may be riskier and less liquid.
What to Actually Evaluate?
Don't stop at AUM. Build a complete picture by considering:
- Fund performance: Historical returns across market cycles. Consistency matters more than isolated peaks.
- Fund manager track record: Their experience and performance across different market conditions.
- Investment strategy: Does it align with your risk capacity and time horizon?
- Portfolio composition: What does the fund actually hold? Does it match the stated objective?
- Your financial situation: Your capacity, time horizon, and specific requirements.
AUM provides context for all these factors. But it's not the deciding factor alone.
Conclusion
AUM tells you how much money a mutual fund manages. It reveals the fund's scale, popularity, and operational dynamics. But here's what AUM doesn't tell you: Whether the fund will deliver good returns going forward. Whether it matches your investment needs. Whether the fund manager is competent.
Smart investing requires the right guidance from a mutual fund distributor and looking beyond any single metric. Performance matters. Strategy matters. Your specific situation matters most. Use AUM as contextual information.
Context depends on fund type and investment approach. There's no universal "good" or "bad" AUM number. Before investing, check the AUM. Understand what that number means for that specific fund type. Consider how it affects liquidity and management efficiency.
Then evaluate everything else. Performance. Strategy. Your requirements. AUM is one piece of the complete picture. An important piece. But just one piece nevertheless. Invest based on a comprehensive evaluation, not isolated metrics.
FAQ’s
1) What does AUM mean in mutual funds?
AUM (Assets Under Management) is the total value of all investments a mutual fund manages for its investors.
2) How is AUM calculated in mutual funds?
AUM = Net Asset Value (NAV) × Total number of outstanding units.
3) Why is AUM important for mutual fund investors?
AUM reflects the fund’s size, investor trust, liquidity, and operational scale.
4) Does higher AUM mean better mutual fund performance?
No, a higher AUM does not guarantee better performance. It simply indicates investor confidence—actual returns depend on the investment strategy, portfolio quality, and fund manager’s skill.
5) Is it safe to invest in low AUM mutual funds?
Low AUM funds are not inherently unsafe, but may carry higher liquidity and operational risk.
6) How does AUM affect a mutual fund’s expense ratio?
Larger AUM usually leads to lower expense ratios due to economies of scale.
7) Can AUM change daily?
Yes, AUM fluctuates daily with market value changes, new investments, and redemptions.
8) What is a good AUM size for a mutual fund?
There’s no universal number — it depends on the fund type, strategy, and asset class.
9) Does AUM impact liquidity in mutual funds?
Yes, higher AUM funds tend to offer better liquidity and smoother redemptions
10) Should I consider AUM before investing in a mutual fund?
Yes, but along with returns, risk profile, fund manager’s record, and investment objectives.