Mutual Funds Day 13: AUM

Assets Under Management (AUM) is a measure of the popularity of a Mutual Fund. When you sum up the investments done by all the investors you get the AUM. A higher AUM along with a growing AUM shows that more and more investors are continuing to invest their capital in the specific fund.

Trust has a role to play in Mutual Fund investing. Most investors do not know or bother about how MFs work. In my opinion, Mutual Funds are a 100% sound & secure financial model. The level of transparency is also quite good for anyone with a decent knowledge to follow and learn. Even then most investors park their capital based on how others have parked theirs (Herd Mentality).

This means that if a Mutual Fund is popular, the AUM will be higher and it gives out a message saying “Hey look, many investors have already signed up with us, you should too”. And this attracts more investors and it becomes an upward spiral.

MFs are a numbers game, if the AUM goes up then the respective AMC will be able to lower its costs as the static expenses will be split more evenly. A higher AUM does well to normalize the fixed costs and this could even mean higher returns for the investors (if the AMC decides to pass on the benefit of lower costs to the customers).

AUM will go up in growth mutual funds as the profits are reinvested back. Whereas for a dividend MF or IDCW option (Income Distribution Cum Capital Withdrawal) the profits are paid out.

For AUM to go up, the capital has to appreciate, fresh investments have to be done, or both.

Your financial advisor is paid based on the AUM he handles. Unlike popular belief, Mutual Fund Distributors are not paid for advisory or consultation but on the merit of how much AUM they handle.

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