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Table of Contents
Table of Contents
The financial assets a person or organisation manages on behalf of its clients are known as assets under management (AUM). AUM is a critical performance measure for many companies in the financial industry. A growing AUM indicates that a business is generating more revenue and profits. Here’s a closer look at what is an asset under management, what affects it, and why it matters to investors.
What is Asset Under Management (AUM)?
Let’s begin by explaining the meaning of assets under management. The Asset Under Management (AUM) refers to the cumulative total of investments held by a specific Mutual Fund. It signifies the collective market value of the fund’s holdings, encompassing both the asset value and capital.
The concept of AUM in Mutual Funds shares similarities with market capitalization in direct stock trading – both indicators reflect the potential returns generated in relation to investors’ resources.
AUM is under the purview of fund houses, overseen by fund managers who monitor asset performance and make investment choices to facilitate substantial capital growth for investors. AUM serves as a measure of performance and a gauge of a fund house’s scale.
The precise AUM value includes bank deposits, Mutual Funds, and cash reserves for a given period. Greater investment inflows, quality, and management skill on the side of a fund house are thus indicated by greater AUM values. A percentage of the total Asset Under Management is frequently used to calculate their fees. Daily variations in AUM often reflect the influx and outflow of resources within the companies in which fund houses invest. Funds with higher AUM are generally more liquid in nature.
Calculation of Assets Under Management (AUM)
Different methodologies are employed by fund houses to calculate AUM. The AUM of a fund is determined by three variables: inflows, outflows, and market prices. At any given time, both inflows and outflows are occurring, leading to net flows (inflows minus outflows). Positive net flows often lead to an increase in AUM, although not invariably. A growth in AUM can also be attributed to an increase in the market value of the underlying assets, albeit this is not always the case.
If net flows are positive and market prices rise, AUM will grow. Conversely, if net flows are negative and market prices decrease, AUM will decline. When one factor is positive and the other is negative, the larger of the two will predominantly drive the change in AUM.
What is an AUM Fee?
An Assets Under Management (AUM) fee is a modest charge levied by fund managers or financial advisors to their clients. The advisory services associated with the management of a particular investment are included in this price. Generally, it is assessed as a small percentage relative to the AUM of the fund or portfolio being managed by the professionals.
Let’s take a Rs.20,000 investment in a mutual fund as an example. If the fund manager requests an annual AUM fee of 2%, the fee would amount to Rs.200 per year. Notably, AUM fees are usually calculated based on the individual investor’s personal investment, not the total AUM of the fund manager.
Significance of AUM in Mutual Funds
Several crucial reasons underscore the importance of AUM:
Indication of fund’s scale and size: A mutual fund’s AUM provides a transparent gauge of its size and reach. A larger AUM typically signifies an established fund with the capacity to attract more investors and engage in substantial investments. Investors looking for a fund with strong historical performance and significant growth potential may find this particularly interesting.
Influence on investment decisions: The magnitude of a fund’s AUM directly influences its investment choices. For instance, a small-cap fund that expands significantly may encounter challenges deploying funds due to the limited pool of small-sized companies. This could hinder its ability to achieve substantial exposure to desired companies.
Impact on fund performance: A mutual fund’s performance can be impacted by its AUM. A larger AUM may pose difficulties in achieving high returns as identifying investment opportunities capable of substantial gains without market disruption becomes more complex. Smaller funds, on the other hand, might have more freedom to take advantage of special investment opportunities and provide better returns.
Effect on fund fees: The AUM of a mutual fund also plays a role in determining investor fees. SEBI has implemented a tiered expense ratio structure, wherein larger funds incur lower fees, and smaller funds may have comparatively higher fees. It’s crucial to remember that bigger funds could require greater minimum investments, which might make them less accessible to some investors.
Factors Influencing Assets Under Management
The size of Assets Under Management (AUM) can be influenced by a spectrum of factors, detailed below:
Market Dynamics: AUM can be significantly swayed by overarching economic patterns, global geopolitical events, fluctuations in interest rates, and prevailing investor sentiments.
Investment Performance: The returns generated, the associated risks, and the consistency of investment strategies all contribute to shaping AUM. Positive performance can attract a larger investor base and bolster AUM, whereas subpar performance can lead to fund outflows and diminished AUM.
Inflows and Outflows: The net cash flows resulting from investor actions—comprising fresh investments, redemptions, and fund transfers—play a pivotal role in impacting AUM.
Client Retention and Acquisition: The capacity of investment entities to both retain current clients and attract new ones significantly influences AUM. This involves effective marketing, sales efforts, and the quality of customer service.
Competitive Environment: The landscape of the financial industry, encompassing the number, quality, and cost of investment alternatives, directly shapes AUM figures.
Assets Under Management (AUM) and Investment Approaches
The following are some of the best known investment strategies based on AUM.
Effect of Passive vs. Active Investing on AUM: The size of AUM can be shaped by the prevalence and effectiveness of passive index funds as well as the reputation and expertise of active fund managers. Passive investment entails placing funds in index funds, typically entailing lower fees and reduced risk compared to active investment. Despite this, active investment possesses the potential to yield greater returns, thereby attracting more clientele and augmenting AUM. Furthermore, alternative investments like private equity and hedge funds can impact the growth of Assets Under Management.
Impact of Alternative Investments on AUM: AUM can experience growth through the interest in alternative asset categories, such as real estate, commodities, hedge funds, and private equity.
Influence of Investment Strategies on AUM Expansion: A fund’s investment approach, risk appetite, and historical performance can have a bearing on the expansion of AUM.
Conclusion
Assets Under Management can possess varying connotations depending on the context in which they are encountered. It might signify the cumulative investment value in a mutual fund, the market value of assets overseen by a financial advisor, or the capital you have invested in a particular firm. Moreover, AUM can sometimes aid in gauging the standing of a financial institution, yet relying solely on it as a determining factor is not advisable.