Importance of AUM in mutual funds
Investing in mutual funds online is one of the most preferred ways of investing in the country. Mutual funds can offer good returns over time and help you save tax and beat inflation. There are different types of mutual funds for every goal and risk appetite, and you can decide on a suitable mutual fund investment based on several factors, one of which is the AUM or the assets under management.
This article will talk about the role of AUM in mutual funds and whether or not it plays an important role in their performance.
What is AUM?
AUM is the fund or asset size of the mutual fund. It represents the amount of money or the total capital that a mutual fund holds. Based on the flow of funds, the AUM can fluctuate now and then. The fund manager is in charge of the AUM of each fund and invests it further. It includes the money invested by investors as well as the returns earned by the mutual fund.
How important is AUM in selecting mutual funds?
Generally, a higher AUM indicates the success of the fund and the fund house. However, a high AUM does not guarantee better returns all the time.
The AUM may or may not play a role in deciding the type of fund you invest in. Here’s how:
- In the case of debt funds: The AUM is important while selecting debt mutual funds. A higher AUM in a debt fund translates to a lower expense ratio for investors. When a debt fund has more capital, it can distribute the fixed fund expenses across investors. As a result, the individual expenses ratio for each investor is reduced. This, in turn, boosts the fund returns. Mutual funds online that have a higher AUM can also negotiate better rates with debt issuers.
- In the case of equity funds: When it comes to equity funds, the AUM does not determine the fund’s performance. In fact, many equity funds have delivered a better performance with a lower AUM than a higher AUM. If you wish to invest in an equity fund, the AUM should not be your main focus. Instead, you can focus on factors, such as the reputation of the fund house and the credibility of the fund manager, consistency in returns during market fluctuations, past track record, expense ratio, etc.
So, should you check the AUM of the mutual fund before investing in a mutual fund SIP or not?
Yes, you should always check the AUM of the mutual fund before you invest in it. Although the AUM is not the sole indicator of the mutual fund’s performance, it does give you an insight into the fund. It may be advised to compare the AUM along with the expense ratio, risk, and return, reputation of the fund house, past performance, etc. b,efore you zero in on a fund.
Make sure you compare different funds online on the Tata Capital Moneyfy app and invest your money wisely. It is important to look at different metrics in the fund so that you choose the right one.