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Confused about which mutual fund to choose? AUM could be your determining factor.
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.
Assets Under Management (AUM) indicates a company’s size and influence. It reflects potential earnings from fees and commissions. AUM informs investors about a company’s capacity and market performance.
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) reflects the total money a company or individual manages for others. It’s crucial for assessing a company’s financial handling skills.
What is AUM in a mutual fund? 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.
Assets Under Management (AUM) gauges a mutual fund’s size and success. It influences fees, manager compensation, and fund performance. High AUM is desirable for mutual funds.
Features of AUM
- Diverse investment portfolios: Assets Under Management (AUM) includes various investments like stocks, bonds, and real estate, held by individuals, corporations, and organizations.
- Financial management evaluation: AUM is a performance metric for investment managers or financial institutions. It helps assess a fund manager’s ability to manage diverse portfolios.
- Inclusion criteria: In calculating AUM, institutions may include bank deposits, mutual funds, cash, etc. Some only count funds under their discretionary management, primarily from individual investors.
- Business growth indicator: A rise in AUM indicates business growth and investor trust, attracting more clients. It’s crucial for revenue as managers earn fees based on AUM.
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.
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:
- 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.
- 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.
- 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:
AUM = Market Value of Asset 1 + Market Value of Asset 2 + … + Market Value of Asset n
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.
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.
FAQs
Assets Under Management (AUM) is the total market value of assets an asset manager oversees. It includes stocks, bonds, and cash within the funds. Net Asset Value (NAV) is the total value of a fund’s assets minus its liabilities. Essentially, NAV is the AUM of a fund minus its liabilities. So, AUM reflects total assets, while NAV accounts for liabilities.
Assets Under Management (AUM) refers to the total market value of investments managed by a person or entity on behalf of clients. It includes bank deposits, mutual funds, and cash. Total Assets, on the other hand, is a broader term that includes all assets owned by a company or individual, not just those being managed on behalf of clients. So, AUM is a subset of Total Assets.
A high Assets Under Management (AUM) can indicate a fund’s popularity and management quality. However, it’s not always beneficial. For equity funds, consistent performance across market cycles is more important than AUM. In debt funds, a high AUM can better distribute fixed expenses. For small-cap funds, a large AUM could impact stock prices and liquidity. Therefore, high AUM can be both good and bad, depending on the context.
In Systematic Investment Plans (SIPs), Assets Under Management (AUM) refers to the total market value of all assets, such as stocks and bonds, that a mutual fund manages on behalf of its investors. The AUM of SIP-linked mutual funds reached a record 15% of the AUM of the mutual fund industry in December 2021. Therefore, AUM in SIP indicates the size of the SIP-linked mutual fund.
Increasing Assets Under Management (AUM) involves several strategies:
Portfolio Diversification: Diversifying investments can attract a wider range of investors.
Marketing and Advertising: Effective promotion can increase visibility and attract more investors.
Performance-Based Incentives: Incentives can motivate better investment performance, attracting more funds.
Client Relationships: Building strong relationships can retain existing clients and attract new ones.
Market Expansion and Technological Innovation: These can improve accessibility and performance.