What is Assets Under Management (AUM) in Mutual Funds?

What is AUM Full Form and Definition?

The full form of AUM is assets under management. AUM is defined as the market value of all investments i.e. stocks, bonds, money market instruments, cash/cash equivalents, etc. held by a mutual fund in its investment portfolio. 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.

While the price of stocks and bonds changes in real-time, AUM calculation is done only at the end of each trading day. So AUM of a mutual fund changes only once at the end of each trading day based on the closing price of the investments held in the mutual fund portfolio.     

How is AUM In Mutual Funds Calculated?

For financial institutions and investment organisations, calculating AUM is a critical step in figuring out the entire value of the assets they oversee on behalf of their clients. The AUM figure offers important information regarding these institutions' size, effectiveness, and expansion.

To better understand AUM calculation in mutual funds, let’s take a simple example. Suppose a mutual fund buys 10 shares of company X at Rs.100 each on 31 March 2022. So the initial investment by the mutual fund is Rs. 1000 on 31 March 2022.

Now, suppose the price of each share increases to Rs. 150 per share on 31^st March 2023 at the time of market closing. 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. 1500.

Now since this is the only investment made by the mutual fund, the assets under management (AUM) of the scheme will be Rs. 1500 on 31 March 2023.

Do keep in mind that in real life, Mutual Funds can hold hundreds and thousands of stocks and bonds from multiple companies in its portfolio and naturally their AUM can easily be in the crores. But the underlying AUM calculation formula holds none of the less 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 Payouts)

The above formula takes into account a variety of inflows and outflows of capital in a mutual fund portfolio to arrive at the AUM value of the Mutual Fund. Subsequently this AUM is further used to calculate the NAV of a Mutual Fund.  

Factors Influencing AUM in Mutual Funds

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

• 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.

• Sales Proceeds: If the sale of existing investments of the mutual fund occurs at 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.

• 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.

• 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.

• 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.