What is AUM? Meaning, Calculation & Impact on Returns (2025 Guide)

This article covers What is AUM? (Assets Under Management), a critical metric representing the total market value of investments managed by a mutual fund or financial institution. We analyze its dual impact: how high AUM reduces costs in large-cap funds but creates liquidity risks in small-cap schemes, as revealed by SEBI’s 2025 stress tests. The guide explains the AUM calculation formula, its inverse relationship with Total Expense Ratio (TER), and why Indian investors must distinguish between fund size (AUM) and unit price (NAV) for smarter portfolio decisions in FY 2025-26.

Assets Under Management (AUM) is often the first number investors see, yet it remains one of the most misunderstood metrics in finance. Think of AUM as the “weight” of a ship. A massive ocean liner (high AUM) is stable in rough seas but hard to turn quickly. A small speedboat (low AUM) is agile but vulnerable to turbulence. As of October 2025, the Indian mutual fund industry manages a staggering ₹79.88 lakh crore, a figure that has tripled in the last five years. But does a bigger fund mean a better fund? Not always. For a salaried professional investing ₹10,000 monthly via SIP, understanding AUM is the difference between picking a nimble wealth creator and getting stuck in a sluggish giant.

Understanding Assets Under Management

What is AUM? In simple terms, Assets Under Management (AUM) represents the total market value of all the financial assets that a mutual fund house, venture capital firm, or brokerage manages on behalf of its clients. It is the sum total of investors’ money plus the returns generated on that money, minus any withdrawals.

When you invest ₹5,000 in a mutual fund, that money doesn’t sit idle. The fund manager pools it with contributions from lakhs of other investors to buy stocks, bonds, or gold. The current market value of this entire pool is the AUM.

Who Holds AUM?

• Asset Management Companies (AMCs): Entities like SBI Mutual Fund or HDFC AMC that build and manage portfolios.
• Banks & NBFCs: Institutions managing wealth for high-net-worth individuals.
• Pension Funds: Bodies like PFRDA managing your NPS corpus.

It is important to note that AUM is not static. It fluctuates daily based on two factors: market performance (if stock prices go up, AUM rises) and investor flow (if more people invest than redeem, AUM rises). As per AMFI data, the industry AUM crossed ₹79 lakh crore in late 2025, driven largely by SIP inflows which hit ₹29,529 crore in October 2025.

Importance of AUM in Mutual Funds

Why should you care about the total size of the fund? Because size dictates strategy. The importance of AUM varies significantly depending on where you are investing. It acts as a trust signal but also a constraint.

1. The Trust Signal

A higher AUM often indicates that a fund has a long track record and enjoys investor trust. For example, a fund with ₹50,000 crore AUM has likely weathered multiple market cycles (bull and bear runs), giving investors confidence in its stability.

2. Expense Ratio Benefit

There is a direct link between What is AUM? and your costs. SEBI regulations mandate that as a fund’s AUM increases, the AMC must lower its Total Expense Ratio (TER). This is the benefit of economies of scale. A fund with ₹20,000 crore AUM can spread its fixed costs (fund manager salary, research tools) across a larger base, costing you less per unit than a tiny ₹50 crore fund.

3. Liquidity Buffer

In open-ended funds, investors can redeem their money any day. A fund with a large AUM can easily handle redemption requests of ₹10-20 crore without selling its core stock holdings. A small fund might be forced to sell good stocks at bad prices just to pay exiting investors.

Significance of AUM in different funds

This is where most investors get it wrong. “Bigger is better” is true for some funds, but dangerous for others. Let’s break down how What is AUM? impacts different categories in the Indian context for FY 2025-26.

Large Cap Funds: Bigger is Often Better

For funds investing in India’s top 100 companies (Reliance, TCS, HDFC Bank), a high AUM is an advantage. These stocks are highly liquid; a fund manager can buy or sell ₹500 crore worth of Reliance shares without disturbing the stock price.

• Verdict: High AUM (e.g., ₹20,000+ crore) is positive. It keeps expense ratios low without hurting performance.

Small Cap Funds: The “Size Trap”

Here, high AUM can be a silent killer. Small-cap companies have low trading volumes. If a fund manager holds ₹5,000 crore in small caps and needs to sell, there may not be enough buyers. This leads to “impact cost”—selling at a discount just to get out.

• Real-World Context (2025 Stress Tests): As per SEBI-mandated stress tests released in April/May 2025, funds with massive AUMs faced liquidity challenges.
  • Quant Small Cap Fund (High AUM) required approx. 70 days to liquidate 50% of its portfolio.
  • SBI Small Cap Fund required approx. 54-60 days.
  • Nippon India Small Cap Fund required approx. 27-30 days.
• Verdict: Be cautious. Many funds stop accepting lumpsum investments when AUM gets too high to protect existing investors.

Debt and Liquid Funds: Safety in Numbers

For liquid funds used by corporates and smart investors for short-term parking, high AUM is crucial. It ensures the fund can handle sudden, massive redemptions without freezing withdrawals.

• Verdict: Always prefer Debt/Liquid funds with high AUM (₹10,000+ crore) for safety and negotiating power with bond issuers.

Impact of High AUM on Mutual Funds

When a fund grows into a giant, its behavior changes. Understanding What is AUM? helps you spot these shifts before they hurt your returns.

The Pros: Economies of Scale

As mentioned, SEBI’s TER slabs ensure that as AUM hits milestones (₹500 Cr, ₹750 Cr, etc.), the expense ratio drops.

• Example: A small fund might charge 2.25% TER. A mega-fund might charge only 1.50%. Over 20 years, that 0.75% difference can add lakhs to your corpus.

The Cons: Closet Indexing

When an active equity fund becomes too large (e.g., ₹40,000+ crore), the manager struggles to find enough good stock ideas. To deploy the cash, they often end up buying the standard index stocks (Nifty 50) just to stay invested.

• The Result: You pay active management fees for passive index-like returns. This is called “closet indexing.”

The Agility Issue

A fund with ₹500 crore AUM can enter or exit a stock in hours. A fund with ₹50,000 crore AUM might take weeks to build a position without spiking the price. In volatile markets, high AUM funds are often slower to react.

How is AUM Calculated?

The calculation of What is AUM? is straightforward but dynamic. It is calculated daily by the AMC at the end of the trading session.

The Formula

AUM = (Total Units Outstanding × Current NAV) + Cash Reserves – Liabilities

Alternatively, it can be viewed as:

AUM = Sum of Market Value of All Securities Held + Cash Balance

Example Calculation

Imagine a hypothetical fund, “PL India Growth Fund”:

• Stocks Held: Shares of Infosys, L&T, and ITC worth ₹950 crore.
• Bonds Held: Government securities worth ₹40 crore.
• Cash in Bank: ₹15 crore (for redemptions).
• Liabilities: ₹5 crore (pending fees/bills).

Total AUM = (950 + 40 + 15) – 5 = ₹1,000 Crore.

If the market crashes by 2% tomorrow, the value of stocks drops, and the AUM will decrease even if no investors withdraw money.

AUM and Expense Ratio

The relationship between AUM and the Total Expense Ratio (TER) is inversely proportional—as one goes up, the other typically comes down. This is not just market practice; it is a regulatory mandate.

SEBI’s Role in 2025

As per SEBI guidelines effective in FY 2025-26, AMCs must adhere to strict slabs.

• Small Funds (AUM < ₹500 Cr): Can charge higher TER (up to ~2.25% for equity).
• Large Funds (AUM > ₹50,000 Cr): Must charge significantly lower TER.

In October 2025, SEBI proposed further reducing the TER by up to 0.15% (15 basis points) for open-ended schemes to pass on more benefits to investors. This makes high-AUM funds structurally cheaper. However, investors should not pick a fund solely for low cost if the large size hampers its performance (as seen in small caps).

Differences between AUM and NAV

New investors often confuse What is AUM? (size of the pot) with NAV (price of one spoon). They are distinct metrics with different implications.

• Myth Buster: A fund with an NAV of ₹10 is not “cheaper” than a fund with an NAV of ₹500. If both grow by 10%, you make the same profit. However, a fund with ₹100 crore AUM is fundamentally different from one with ₹10,000 crore AUM in terms of risk and agility.

Conclusion

Understanding What is AUM? gives you a lens to evaluate fund health beyond just past returns. While a massive AUM of ₹80 lakh crore indicates the Indian mutual fund industry’s maturity, your personal choice should depend on the category. Embrace high AUM for stability in debt and large caps, but tread carefully with giants in the small-cap space. The goal is to find the “Goldilocks” fund—large enough to be safe, but small enough to outperform.

Ready to build a portfolio balanced for size and performance? Open your PL Capital account and start investing with expert insights today.

FAQs on AUM

1. What is AUM in mutual funds?

AUM (Assets Under Management) is the total market value of all investments held by a mutual fund scheme at any given time. It includes the capital invested by all unit holders plus the profits generated, minus any withdrawals or liabilities. It indicates the fund’s size.

2. How does AUM affect mutual fund returns?

AUM indirectly affects returns. High AUM leads to lower expense ratios (TER), which boosts net returns. However, in small-cap funds, excessively high AUM can hinder the manager’s ability to buy/sell stocks quickly, potentially dragging down performance due to impact costs.

3. Is higher AUM better for investors?

It depends on the category. For Large Cap and Debt funds, higher AUM is generally better as it ensures lower costs and high liquidity. For Small and Mid Cap funds, very high AUM (e.g., >₹25,000 crore) can restrict agility and lead to lower alpha generation.

4. Does AUM change daily?

Yes, AUM changes every business day. It fluctuates based on the market value of the underlying securities (stocks/bonds) and the net inflow or outflow of investor money. If the market falls, AUM decreases even if no one withdraws money.

5. What is the difference between AUM and NAV?

AUM is the total value of the entire fund’s portfolio (the whole pie), while NAV (Net Asset Value) is the price of a single unit (one slice). AUM indicates the fund’s size and popularity, while NAV is used to calculate the value of your individual holding.