Home Learn What is Asset Under Management & How is it Calculated?
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AUM stands for Asset Under Management is a key metric used in the finance industry to measure the total value of assets that an investment firm or financial advisor manages on behalf of clients. In this blog post, we will explain what AUM means, how it is calculated, and why it matters to various stakeholders, including investors, fund managers, and financial advisors. Now, let us learn the AUM meaning.

## What is Assets Under Management (AUM)?

Assets Under Management is the AUM full form. It means the total value of assets, such as shares, bonds, cash, and other securities, that an investment firm manages on behalf of clients.

The assets included in Asset Under Management vary depending on the type of investment company or fund. For example, mutual funds typically include stocks, bonds, and cash, while hedge funds may include a range of assets, such as commodities, derivatives, and alternative investments.

AUM can be measured daily, monthly, or annually, depending on the investment strategy and reporting requirements.

Assets Under Management in the mutual fund industry is used to measure the total value of assets managed by a mutual fund.

Asset Under Management is different from other financial metrics like revenue, net income, or profit margin. AUM is a measure of the size of an investment firm’s business, while other metrics are measures of profitability. Now that we understand what is Assets Under Management, let us learn how it is calculated.

## AUM Calculation

AUM calculation is straightforward, you need to multiply the number of shares or units held by investors by the current market price of each share or unit. Then, add up the total value of all shares or units.

Here’s the Asset Under Management formula:

AUM = (Number of Shares or Units) x (Current Market Price)

For example, let’s assume that a mutual fund has 100,000 shares outstanding, and each share is worth ₹50. The Asset Under Management calculation of the mutual fund would be as follow:

AUM = (100,000 shares) x (₹50 per share) = ₹5,000,000

## Why is Asset Under Management (AUM) Important?

Asset Under Management is a key performance indicator and compensation factor for financial advisors, who earn fees based on a percentage of AUM.

AUM is important for various stakeholders like investors, businesses, and fund managers. Let’s look at how each of them gets affected:

### Investment firms

• Asset Under Management is a key indicator of the size, performance, and competitiveness of investment firms, especially mutual funds and other pooled investment vehicles.
• Asset Under Management is a critical financial metric for investment firms because it represents the revenue-generating potential of the firm. The larger the AUM, the more revenue an investment firm can generate by charging management fees and other fees on the assets under management.
• Asset Under Management can also affect the investment decisions of fund managers, who may have to adjust their portfolios based on the inflows and outflows of funds. Moreover, AUMs can impact the fees, expenses, and commissions that investors pay to investment firms and financial advisors.

• Financial advisors can boost their AUM by prospecting new clients, enhancing their service offerings, optimizing their investment strategies, and using technology tools to improve client engagement and retention.
• Asset Under Management is a key performance indicator and compensation factor for financial advisors, who earn fees based on a percentage of AUM.
• Technology can help financial advisors to manage their clients’ investment portfolios more efficiently, automate investment decisions, and provide personalized and transparent advice.

### Investors

• For investors, AUM can provide insight into the financial health and capabilities of investment firms. Higher AUM in mutual funds can indicate a strong reputation and a larger customer base, which can provide a level of comfort for investors.
• It can also provide insights into an investment firm’s investment strategy and performance.
• There is no direct relationship between AUM and investment returns. However, investment firms with a higher AUM have more resources to invest in research, analysis, and other areas that can lead to better investment decisions and ultimately higher returns for clients.
• Investors can also use AUM as a criterion for selecting investment options. It can be an indicator of a fund’s popularity and success, but it does not necessarily guarantee good investment returns. It is important to consider other factors, such as investment strategy and past performance when selecting investment options.

## What Does High Aum in Mutual Funds Indicate?

The AUM full form in mutual funds is Asset Under Management. It  holds substantial influence over the performance of mutual funds within the financial market. This impact is primarily contingent on the preferences of fund houses, which tend to favor companies with robust assets, a preference often reciprocated by customers.

A study encompassing 361 distinct equity funds in 2012 revealed that nearly 170 of these funds had an AUM of less than Rs. 100 Crore, and only 68% of them had an AUM of less than Rs. 50 Crore. However, during this period, total investments surged from Rs. 530 Crore in 2008 to a significant Rs. 3841 Crore in 2012, illustrating the remarkable growth potential of Assets Under Management for various organizations.

A substantial asset fund empowers an asset manager to respond swiftly to shifting market opportunities, enabling them to capitalize on timely entries or exits from specific investments. Additionally, investors frequently consider AUM when assessing mutual fund performance and returns.

It is crucial to recognize that a high AUM value does not invariably translate into higher returns generated by the respective Mutual Funds. The performance of Mutual Funds hinges on the adeptness of the portfolio manager, who must leverage market insights to make astute investment decisions.

Furthermore, Mutual Funds with lower AUM typically feature relatively lower Net Asset Values (NAVs), rendering them appealing to investors seeking substantial capital gains through investment in these schemes. Now that we know what is AUM in mutual funds, let us learn how it changes over time.

## How Does AUM Change Over Time?

The total AUM of mutual funds experiences fluctuations due to several key factors:

### Inflows and Outflows of Funds

Changes occur when investors either increase or decrease their investment in a mutual fund by buying additional shares or selling existing ones. These actions directly influence the overall AUM of the fund.

### Market Value of Securities

The AUM of a mutual fund can increase or decrease in response to the market value of the securities within its portfolio. If the value of these securities rises, the AUM goes up; conversely, it decreases when the value of the securities declines.

### Reinvestment of Dividends

When dividends paid by the companies in a mutual fund’s portfolio are reinvested rather than distributed, it can contribute to fluctuations in AUM.

These factors collectively contribute to the continuous change in AUM values.

Moreover, the pace at which AUM changes is influenced by various conditions:

• Funds experiencing frequent inflows and outflows tend to exhibit higher AUM volatility compared to funds with a dedicated and stable investor base.
• Funds investing in volatile securities are more prone to significant AUM fluctuations than those focused on stable, low-volatility securities.

The level of AUM volatility may also be influenced by factors such as the liquidity of the securities held and the frequency of marking-to-market:

• Illiquid securities, which do not trade as frequently, may have a less frequent impact on AUM.
• Private securities, which are not marked-to-market as often as publicly traded ones, result in less frequent changes in AUM values.

## Factors Affecting Asset Under Management (AUM)’

AUM can be influenced by a range of factors, which we’ll explore in this section of the blog:

• Market conditions: Asset Under Management is affected by macroeconomic trends, geopolitical events, interest rates, and investor sentiment.
• Investment performance: Asset Under Management is influenced by the returns, risks, and style consistency of a fund or investment strategy. Investment performance is also a critical factor that affects Asset Under Management. Positive performance can attract more clients and increase AUM, while poor performance can result in outflows and lower AUM.
• Inflows and outflows: Asset Under Management is impacted by the net cash flows of investors, including new investments, redemptions, and transfers.
• Client retention and acquisition: Asset Under Management depends on the ability of investment firms to retain existing clients and attract new ones, through marketing, sales, and customer service.
• Competition: Asset Under Management is influenced by the competitive landscape of the financial industry, including the number, quality, and pricing of investment options.

## Volatility of AUM

Institutions, like mutual funds or hedge funds, face challenges when managing strategies due to volatile Assets Under Management (AUM). This is especially tricky with illiquid investments.

To mitigate these challenges, institutions can employ strategies such as:

• Lock-up Periods: These last from months to years, preventing fund withdrawals during this time.
• Closure to Investors: Funds can be temporarily or permanently closed to prevent further inflows.

These measures are beneficial because they:

• Prevent forced buying or selling of securities, crucial in illiquid markets.
• Avoid excessive AUM growth that can hinder effective allocation.
• Enable the fund to stick to its investment strategy without constant position adjustments due to inflows and outflows.

## How is Expense Ratio and AUM Related?

Mutual Funds deduct a portion of returns to cover operational and administrative costs, known as the expense ratio. This ratio is unique to each fund and is influenced by its AUM size.

The larger the AUM, the more resources are required for efficient management. Consequently, Mutual Funds with substantial AUM tend to have higher expense ratios, meaning greater costs for investors. However, SEBI regulations mandate that a Mutual Fund’s expense ratio must always be less than its AUM.

## Asset Under Management (AUM) and Investment Strategies

### Passive vs. Active Investing and Their Impact on AUM

AUM can be affected by the popularity and performance of passive or index funds, as well as the reputation and skill of active fund managers. Passive investing, which involves investing in index funds, generally results in lower fees and is less risky than active investing. However, active investing has the potential to generate higher returns, which can attract more clients and increase AUM. Alternative investments, such as private equity and hedge funds, can also impact Asset Under Management growth.

### Alternative Investments and AUM

Asset Under Management can be boosted by the demand for alternative asset classes, such as private equity, real estate, hedge funds, or commodities.

### Impact of Investment Strategies on AUM Growth

Asset Under Management can be influenced by the investment style, risk appetite, and track record of a fund.

## To Wrap It Up…

AUM is a crucial financial metric that represents the total value of assets managed by investment firms. It is an indicator of the firm’s success in attracting and retaining clients and generating income and profits. Thus, it is essential to consider the Assets Under Management meaning before investing. Stay safe, and happy investing!

## FAQs

1. What is the meaning of Asset Under Management (AUM)?

Asset Under Management (AUM) represents the combined market value of investments managed for investors by an individual or entity.

2. What is a good AUM size?

Funds vary widely in AUM, ranging from 10 crores to 30,000 crores. AUM’s significance depends on the fund category: high AUM suggests strong investor interest, while low AUM indicates lower interest.

3. How Do Investment Companies Utilize AUM as a Tool?

Investment companies employ AUM as a marketing tool to attract new investors and gauge their operations’ size compared to competitors.

4. What Information Does AUM Convey to Prospective Investors?

Investment companies employ AUM as a marketing tool to attract new investors and gauge their operations’ size compared to competitors.

5. Is NAV affected by AUM?

AUM represents the total assets under the control of a mutual fund, encompassing both invested assets and cash holdings. NAV, or Net Asset Value, signifies the price of each unit of a mutual fund.