Before investing in a mutual fund, you should first ensure that you’re well aware of the various concepts and terms associated with the asset class. This will help you make an informed investment decision that aligns with your financial objectives. Among the many terms and concepts surrounding mutual funds, the one that we will be taking a look at in detail is AUM. It is one of the many metrics that investors should take a look at before investing in a mutual fund. Here’s everything you need to know about it. 

What is AUM in a Mutual Fund? 

AUM is an acronym for Assets Under Management. It is a metric that’s used to represent the total market value of all of the securities in a mutual fund. Since the price of the securities in a mutual fund changes according to the market's movement, the AUM of the fund also changes accordingly. 

How is the AUM Calculated?

Now that you’ve seen what AUM in a mutual fund is, let’s take a look at how it is calculated. The methodology used to calculate the AUM of a mutual fund may vary slightly from one fund house to another. However, most fund houses use the following formula to ascertain the value of the Assets Under Management. 

AUM = Current NAV of the fund * The number of outstanding units of the mutual fund 

So, for instance, if the NAV of a mutual fund is Rs. 88 and the number of outstanding units is about 1,86,000, then the AUM would be Rs. 1,63,68,000 (Rs. 88 * 1,86,000 units).

As the NAV and the number of outstanding units change with every trading session, the AUM also changes. However, although the value of the Assets Under Management varies at the end of a trading session, mutual fund houses generally tend to declare them only once a month (typically at the end). You can find the AUM of a mutual fund by perusing the fund’s fact sheet, visiting the website of the fund house, or heading over to a mutual fund platform. 

How Important is the AUM?

Many investors tend to give the AUM of a mutual fund significant weightage when deciding which fund to invest in. But is it really that important? As a matter of fact, the importance of AUM is dependent on the kind of mutual fund that you’re planning to invest in. 

For instance, in the case of equity mutual funds, the Assets Under Management figure is not something that an investor needs to focus on. Instead, they should be focusing on other aspects of the mutual fund, such as the experience of the fund manager, and the expense ratio, among others. 

In the case of debt mutual funds, however, the value of Assets Under Management plays a very important role. The more the AUM, the more the number of investors. This allows the fund house to spread the operating expenses across a larger investor base, which lowers the expense ratio and boosts returns.

Should You Consider AUM Before Investing in a Mutual Fund?

Yes. You should consider the AUM of a mutual fund before investing in one. That said, there are a few pointers that you should keep in mind. 

• A fund with a high AUM is usually more trustworthy due to the presence of a large number of investors. 
• The higher the AUM of a fund, the greater its liquidity is likely to be. This allows you to enter and exit the fund as and when you wish without running into any issues. 
• However, the AUM of a mutual fund has no bearing on its performance whatsoever. There are cases of funds with high AUM underperforming and vice versa. 
• While AUM is a good metric, it shouldn’t be used solely to determine the viability of a mutual fund. It is advisable to read the AUM along with other indicators such as the past performance of the fund, expense ratio, experience of the fund manager, and risk management strategies of the fund, among others, when determining whether a mutual fund is worth investing in or not. 

Conclusion

Hope you’re now aware of what AUM in a mutual fund is. A good mutual fund is not one that has high Assets Under Management, but one that performs well in different market scenarios. Keep this in mind when choosing a fund to invest in. 

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