Understanding AUM: Mastering financial skills

The industry’s AUM reached a significant milestone, surpassing ₹10 trillion (₹10 lakh crore) in May 2014.

In just three years, it doubled, exceeding ₹20 trillion (₹20 lakh crore) by August 2017. By November 2020, AUM had surpassed ₹30 trillion (₹30 lakh crore).

As of August 31, 2023, the industry’s AUM stands at ₹46.63 trillion (₹46.63 lakh crore).

The full form of AUM is Asset Under Management. It is a pivotal metric in the financial world, signifying the total value of assets that a financial institution, investment company, or fund manager manages on behalf of clients.

AUM, or assets under management, means all the money a company manages for people. It includes stocks, bonds, and real estate.

AUM is like a measure of how big and influential a company is and how much money it can make from fees and commissions. Investors and others need to know about AUM because it tells us how much a company can handle and how well it’s doing in the market. 

This article explains AUM in more detail, showing why it matters, especially in the mutual fund industry.

What is an asset under management?

Assets under management (AUM) is like a big deal in finance. It tells you how much money a person or company is taking care of for other people. It’s super important when you want to know if a company is good at handling money for others.

What is AUM in mutual funds? Asset Under Management (AUM) in the mutual fund industry refers to the total market value of all investments held within a mutual fund portfolio. It represents the collective assets entrusted to the fund manager by investors. 

AUM is like a measuring stick for mutual funds. It tells us how big and successful a fund is. Measuring which affects how much you pay in fees, how much the manager gets paid, and how well the fund does. So, it’s a big deal for mutual funds to have a lot of AUM.

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Features of AUM

• Diverse investment portfolios: AUM refers to all of the various investments such as stocks, bonds, and real estate. It is not exclusive to individuals; prominent corporations and organisations also store their assets within it.
• Financial management evaluation: AUM serves as a performance metric, gauging an investment manager’s or financial institution’s success. AUM is required to research the ability of fund managers to manage diverse portfolios.
• Inclusion criteria: While calculating AUM, financial institutions might include bank deposits, mutual funds, cash, and other investment vehicles. Some entities only consider funds under their discretionary management, mainly from individual investors seeking professional asset management.
• Business growth indicator: An increase in AUM often signifies business growth and investor trust, attracting more clients. AUM is an important variable in revenue generation because fund managers earn fees based on it.

Process of calculating AUM

In the calculation of AUM, certain financial institutions incorporate various financial instruments, including bank deposits, mutual funds, and cash.

Conversely, others restrict it to the funds under their direct management, specifically those provided by individual investors seeking discretionary management services. 

Understanding AUM is important for assessing a financial entity’s capability and scope when handling the assets of clients.

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AUM is the total market value of assets that a financial institution, investment company, or portfolio manager manages on behalf of clients. Calculating AUM involves summing up the market values of all the individual assets under management.

Given below is a guide to calculate aum:

1. List all managed assets: Compile a list of all the assets that your institution or portfolio manager is responsible for managing. Stocks, bonds, mutual funds, real estate, cash, bank deposits, and other financial instruments are examples of assets.
2. Determine market values: For each asset in the list, determine its current market value. The market value is the price at which the asset could be sold in the open market as of a specific date. This value can fluctuate daily for assets like stocks and bonds.
3. Sum the market values: Add up the market values of all the individual assets on your list. This sum represents the total value of assets under management.

Asset under management formula:

Where:

AUM = Assets Under Management

Market Value of Asset 1, 2, …, n = The market value of each individual asset in the portfolio

Factors that influence AUM

• Economic conditions: AUM can rise or fall based on economic trends, as market fluctuations impact asset values. Fixed-income investments are impacted by fluctuating interest rates, which can also affect AUM levels.
• Investment strategies: Effective asset allocation strategies can attract more investors, leading to AUM growth. A strong track record of delivering consistent returns can boost investor confidence and attract more assets.
• Client retention: Retaining existing clients is crucial, as it ensures ongoing AUM growth. Effective marketing campaigns and client outreach can lead to a client base and increased AUM.
• Compliance and regulations: Changes in financial regulations can impact the types of assets managed and the ability to attract new clients. Abiding by regulatory reporting standards is required to maintain and attract clients.

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Bottomline

AUM is like a health check for the finance world. It tells us how big and busy investment companies are and how well they handle people’s money. AUM also shows that good money management and growth plans matter a lot. 

So, the changing and growing AUM has a powerful impact on the investment decisions of individual investors and finance companies.