Asset Under Management shows the market value of the assets held by a mutual fund scheme. It practically shows the size of the scheme. Calculation of AUM may vary from fund to fund. Assets include financial assets, cash etc.
The AUM of a fund may grow due to an increase in the market value of the current assets and when the investment in the scheme is higher than the redemption from the scheme. Similarly, the AUM dips when the market value of the assets go down and/or redemption from the scheme is higher than the investment in the scheme.
For an Asset Management Company (AMC), a bigger AUM means higher revenue for the company because they charge a percentage of the AUM as management fees. Schemes with higher AUM may also offer lower TER (Total Expense Ratio).
Before we consider the theoretical factors which can affect the AUM for a mutual fund – let us clear that type of mutual fund scheme has a significant impact on the AUM of the scheme. Our goal is to understand the overall implication of the size on performance irrespective of the type of the fund.
1. Economies of Scale
A higher AUM means that various costs such as research, salaries etc. can be spread over more broadly. This lowers the average cost for the fund per unit and in-turn the Total Expense Ratio. A lower expense ratio means a better return for the unitholders.
2. Asset allocation
An excessively small or excessively large AUM may pose challenges in asset allocation for the fund managers.
Depending on fund type, an excessively small AUM may limit the fund manager's capability to implement its strategic asset allocation. But, a large AUM may create a situation where fund managers struggle to find enough investment opportunities. This may result in higher percentage cash in the portfolio dragging the fund performance down.
Various research papers suggest than higher AUM and fund flows erodes the performance for a mutual fund scheme. Below are the links to such research reports