The mutual fund process begins by garnering amounts from the public through the launch of a new mutual fund scheme.
Over a period of time the mutual fund scheme generates money and than it has to allocate money into various instruments like equities, debt instruments or even gold, if it has the mandate to do so.
So, how do we determine assets under management?
Let us site this with an example. Say, a company has the following assets in which it has invested:
Shares - Rs 100
Debt - Rs 50
Gold Rs 2
Total Assets Rs 152
Minus Liabilities: Rs 2
Assets under management Rs 150
The above is just a very simplistic explanation of assets under management. It could get much more complicated than that.
Why individuals look at assets under management or AUM?
When investing, in open ended schemes, many individuals look at the assets under management of a particular scheme. There could be various reasons for doing so. One of the reasons is because higher the AUM amount, better could be the management of the fund.
What this means is that investors have the confidence in the fund, because a lot of investors have invested in the same, which shows the confidence. For example, if one funds has an assets under management of Rs 1000 crores and the other has Rs 14,000 crores, you may go with the latter, because a lot of investors have shown faith in them.
However, that should not be the only reason to invest. You should also look at the past track record of the fund. One of the most important things would be your own objective for investing. For example, if you are risk averse investor, you may prefer debt instruments. On the other hand, if you are ready to take risk. You could go the equity way of investing.
In any case, do make a careful choice and do not go purely by the assets under management.