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Know everything about Assets Under Management (AUM)

  • Bhumika Dutta
  • Mar 27, 2022
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It is easy to know about any mutual fund and invest in it, but you have to keep in mind that you are not the only one investing in this fund. There are a lot of investors investing in the same mutual fund scheme and when we add up the total amount made by all the investors, we get the Assets Under Management (AUM).

 

This article is about the concept of AUM and its impacts on the market, and by the end, you will know everything you need to know about this concept.

 

What is AUM?

 

If we talk about the technical definition of Assets Under Management (AUM), it is the total market value of the investments held by the Mutual Fund. Simply put, it is the money that the mutual fund manages on behalf of its clients/investors, so the performance of the mutual fund is reflected under the AUM. 

 

Bank deposits, mutual funds, cash reserves, and other assets are included in the AUM value. 

 

Better performance would mean higher assets under management, but investors should not base their investment decisions only on this element. A larger AUM allows the fund manager to make more difficult decisions about entry and exit strategies for a given investment.

 

AUM changes regularly, reflecting the input and outflow of funds from the organizations in which fund houses invest. The funds with the most assets are usually the most liquid.

 

Example of AUM:

 

AUM can be clearly understood with this example, if an individual invests $20,000 in a mutual fund, the funds become part of the overall AUM, or pool of funds. Without getting any extra special authorization, the fund manager can purchase and sell shares following the fund's investment goal using all of the invested funds. 

 

Some investment managers in the wealth management business may have some requirements depending on AUM. To put it another way, an investor may be required to have a specific level of personal AUM in order to be eligible for a certain form of investment, such as a hedge fund. 

 

Wealth managers want to make sure their clients can weather volatile markets without losing too much money. The amount of money an investor has in their account may also influence the sort of services he or she receives from a financial adviser or brokerage firm. Individual assets under management may, in certain situations, correspond to an individual's net worth.

 

AUM Fee:

 

AUM Fees are charges made by mutual funds, investment advisers, and other financial professionals to their customers as a proportion of the assets under managed for that client. They are measured in tenths of a percentage point, which is referred to as the basis point (bps). These fees are frequently paid on a regular basis, and they might be computed on a daily, monthly, quarterly, or other agreed-upon schedules.

 

Also Read | Gilt Funds: Features, Returns, and Benefits


 

AUM concerning different mutual funds:

 

Mutual funds' AUM has a substantial impact on their success in the financial market. It's crucial to examine the assets under management since they indicate the company's size and success. 

 

Before making any investment, investors should examine the company's performance, albeit it is not the only element to consider. The relevance of the AUM in relation to various investment alternatives is summarized below:

 

  1. Debt Funds:

 

One of the most important aspects of debt funds is total assets. Debt funds with greater capital can spread their expenditures among a bigger number of participants, lowering fixed fund expenses and increasing returns for each member.

 

 

  1. Equity Funds:

 

Equity funds should, in theory, provide a positive return and beat the benchmark index during market highs and lows. To increase returns, equity funds rely less on AUM and more on the asset manager's ability.

 

 

  1. Small-cap Funds:

 

Small-cap funds aren't very reliant on assets under management (AUM). These are only impacted when assets exceed a certain threshold, such as when fund firms become large shareholders in a company. Small-cap mutual funds Investing in SIPs rather than bigger assets is a common way to avoid calculating AUM.

 

 

  1. Large-cap Funds:

 

The returns achieved by large-cap funds are generally determined by market yields, not by AUM. There have been multiple instances where firms with smaller asset classes have accumulated much fewer stocks of such institutions as compared to companies with larger assets. It's worth noting that a bigger AUM doesn't always imply higher returns.


 

How to calculate AUM?

 

When it comes to determining the management fee, the AUM is the most important factor. The cost ratio is a fee charged by all fund houses in proportion to the size of the fund. Management and operational costs are included in the expense ratio. 

 

The Securities and Exchange Board of India (SEBI) has set a clear maximum limit on cost ratios for mutual funds based on assets under management (AUMs). Because it is computed as a proportion of AUM, a greater AUM equals higher fees for the fund house, whereas a lower AUM means lower fees for the fund house.

 

SEBI allows a maximum total cost ratio of 2.5 percent for the first Rs.100 crore of average weekly AUMs, 2.25 percent for the next Rs.300 crores, and 1.75 percent for all AUMs above that for equity mutual funds. The maximum TER allowed for debt mutual funds is 0.25 percent lower than for equity funds.


 

Impact of Higher AUM on Mutual Funds:

 

A bigger asset under management does not always imply that the fund is performing well. The fund manager's actions have a significant impact on the fund's success. These decisions include the entrance and exit strategy for a certain investment, the holding time, and so on.

 

While having a large asset fund helps a manager to take advantage of ever-changing market possibilities, investors should compare the returns achieved by the fund over time to its benchmark returns.

 

A bigger asset under management does not automatically imply that a fund is performing well. A fund manager is in charge of making choices about a specific investment's entrance and exit strategy, as well as taking advantage of changing market possibilities. The investors benefit from capital appreciation in their assets as a result of the fund manager's choice.

 

Factors that change AUM over time:

 

The number of assets under management fluctuates according to the following factors:

 

  • Funds inflows and outflows. 

 

Investors in a mutual fund can grow or decrease the amount of their investment by purchasing more shares or selling existing ones, affecting the fund's total assets under management (AUM).

 

 

  • The market value of the securities held by AUM

 

When the market value of a mutual fund's securities grows, for example, its AUM increases.

 

 

  • The number of dividends paid

 

The dividends are reinvested and not dispersed, the number of dividends paid by the firms in the institution's portfolio.


 

Difference between AUM vs NAV:

 

A similar concept is Net Asset Value or NAV. It is the entire value of a fund's assets minus all of its liabilities. It is frequently displayed on a per-share basis. The NAV is the price at which a fund's share can be purchased and sold. 

 

AUM, on the other hand, refers to the entire value of assets managed by a company or an individual. AUM is not calculated on a per-share basis, unlike NAV. It's best to concentrate on the AUM while investing. It covers all of a mutual fund's assets as well as the cash it holds. The NAV of a mutual fund is the price of each unit.

 

Also Read | Liquid Funds: Working and Benefits


 

AUM and Expense Ratio:

 

The entire amount withdrawn from mutual fund returns is used to guarantee that operations run smoothly and that the funds are properly administered and managed. These costs are referred to as the expense ratio, which is unique to each mutual fund. The cost ratio of a particular fund is determined by its AUM since bigger asset values need more time and effort for optimum management.

 

AUM is directly proportional to the cost ratio charged by mutual funds, suggesting that more fees are payable when investing in mutual funds with a bigger AUM. However, SEBI regulations dictate that a mutual fund's expenditure ratio must be precisely smaller than its AUM.


 

Conclusion:

 

AUM contributes to the firm's market value. It may be used as a marketing technique to attract prospective new clients and has shown to be profitable. This improves the investment firm's or brokerage house's or portfolio manager's credibility, which will eventually lead to new clients and cash for the firm. We've covered all there is to know about Assets Under Management in this post.

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