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AUM – Assets under Management

Last Update Date : October 05, 2018

aum

AUM or Assets under Management is an important decision-making tool in Finance and Strategic market. Investors have a right to fair disclosure of an asset manager’s true performance over a period of time, so that they can understand that their portfolio is moving towards correct direction.

What is AUM?

AUM stands for Assets Under Management and also known as Funds under Management, sometimes. It is a measure of money that an Asset manager, such as a personal wealth advisor or mutual fund company, manages on behalf of his clients. Assets under management include funds with which the transactions can be made without consulting the investor. AUM is the total market value of assets that a mutual fund contains.

Assets under management include the capital raised by the investors and the capital which belongs to the principals of the fund management firm.
For example, if fund managers contribute Rs 1 Lakh of their own capital to the fund and raise additional Rs 20 lakhs from investors, then AUM is Rs 21 lakhs.

AUM is an indicator of the size and success of a fund house. The AUM-value also includes the returns that a mutual fund earns.

How to calculate AUM?

There are different methods to calculate the assets under management. First, the portfolios to be included in the calculation of AUM are to be determined. After determining that a particular portfolio qualifies for inclusion, individual portfolio value is to be calculated. The value of a portfolio equals the total value of individual assets in the portfolio. The value of an asset is equal to the current market price multiplied by the number of assets in the portfolio.

Why AUM Matters?

Assessment and comparison of AUM are important for management in determining the strengths and weaknesses of a firm. It can be a decision-making point. Investment companies also use assets under management as a tool to attract investors. AUM may prove to be helpful for the investors in getting a hint of the size of a company’s operations. It may also be a major factor to be considered for new fund investors and wealth management services. Products with higher AUM have higher trading volumes which positively influence the liquidity of a product.

Importance of AUM before Investing?

Mutual fund investors often look at the fund’s AUM and prefer a fund house whose AUM is on the higher side. It is a common belief that if many investors have already invested in the fund, then it must be a good one. However, there are numerous reasons why AUM should not be the only key factor while choosing a fund. There are many other factors such as the expense ratio, compliance with investment mandate and reputation of the fund manager which also needs to be considered before investing in funds.

Let’s understand the importance of AUM concerning different types of funds.

  1. Equity fund: An asset manager must aim at the consistency of the Equity funds rather than the size or popularity of the markets.
  2. Debt fund: The fixed fund expenses in the debt fund get spread over a large number of investors which helps to reduce the expense ratio per person. Hence more AUM will attract more investors.
  3. Small cap funds: If a fund holds the majority of the shares in a company, it may not be able to trade easily during the market fluctuation due to its high volume. Thus the investors with high-risk appetite must go for investing in small-cap funds to earn high returns.
  4. Large-cap funds: Large-cap mutual funds schemes provide consistent returns as the risk is quite low. The investors seeking constant growth of capital and stable earnings in the future should invest their money in large-cap funds.

Impact of AUM on Mutual Funds

There are chances where a fund’s rising AUM can affect its performance negatively. But still, there is almost no evidence which indicates that a higher AUM affects the fund performance negatively. It is the responsibility of the fund manager to analyse the market opportunities. In many cases, a larger AUM imposes limitations on the manager in taking quick investment calls. Therefore, before investing, you should consider the performance of the fund you invested in against its competitors.

Investors are entitled to a true and fair view of an asset manager’s true performance over time. Because many asset management companies compare the range of their AUM with competitors as a measure of performance of fund house. Thus, the accurate disclosure is especially important for correctly evaluating an asset manager’s performance.

Effect of AUM on Effect Ratio or Fee

Every fund house levies a fee, which is called Management Fee, to cover the admin charges and asset manager’s compensation for his efforts. It is a flat rate calculated on the whole fund amount. It is charged to investors based on the number of units they hold. The fund performance has no direct impact on the fees. Total Expense Ratio (TER) is the annual costs to operate a mutual fund. Securities Exchange Board of India (SEBI) dictate the AUM to be always higher than Total Expense Ratio.

To sum things up, AUM is a good method to analyse a fund’s popularity and performance before investing. But the risk is an important factor. Thus, your investment decisions shouldn’t affect because of AUM. Feel free to reach us.

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