What is AUM?
Updated on 24 Feb 2020
‘AUM’ or ‘Assets Under Management’ is a term we have all heard and associate freely with wealth managers. But why is it important for an investor to know this term? Let us tell you in detail.
What is AUM?
In finance, Assets under Management (AUM) is a measure of the total market value of all the financial assets that an entity or an individual manages to have on behalf of clients. However, this definition can take slightly different angles according to the company in question. Some companies include mutual funds, bank deposits and the cash-in-hand as well in these calculations while some do not.
AUM is basically just one of the various aspects to evaluate a company’s performance and worth. If you see higher investment inflows and positive AUM comparisons, these are good enough parameters to understand how your assets are performing in the market.
In simpler terms, AUM tells you about the amount of money of an investor, an individual or an entity manages or handles at a time. It is the total sum of money that a registered investment advisor or portfolio manager handles, either of all the clients of the company or of individual clients. The manager or the advisor has the power to use the amount that falls under AUM in any which way to make further investments. Furthermore, an AUM now also determines the credibility of an investor as bigger the AUM, the more likely is the investor to get the services from an advisor or a brokerage.
Factors affecting the AUM of a Company
- Market Fluctuations
- Performance of the Fund
- Number of investors in the Fund
- Size/Value of the Fund
- Company’s underlying Investments
How to calculate AUM?
There is no single way to calculate AUM as it varies from company to company. It is a figure that changes on a daily basis based on the performance of your assets. Capital appreciation, reinvested dividends and increased investor flows are some of the major factors that affect the AUM positively. Conversely, a loss in market cap or drop in the amount of investor inflows tell you how there has been a drop in the AUM.
Furthermore, fund closures, investment performances losses and client redemptions are some of the other major factors that affect the AUM negatively.
Why does AUM matter?
The best way to put this is that AUM tells you about the strength of a company. The bigger the AUM of a company, the better the credibility. In fact, it is also a tool that most companies use to attract other investors to the company.
It is natural that an investor trusts a company that has more assets under management. Another way AUM matters is how it determines the handling fees of brokerage companies. More the AUM, the handling fees is less and this in turn helps such financial advisors and brokerage companies to attract big investors.
How does AUM affect your funds?
One of the biggest myths in finance is how you should invest in a company by just looking at its AUM as it shows how well the company has been performing. This may be true, but only in bits and pieces as you need to factor in a lot more things than just this, like the reputation and experience of the fund manager, the expense ratio and compliance investment mandate. Let us see how AUM is important to different fund types.
Equity funds have got more to do with the skills of the asset manager than the AUM. An asset manager should have the ability to churn out good returns consistently, irrespective of the popularity or size of the company. Here, consistency in returns the fund house complying to the investment mandate is much superior to how much AUM is there.
When it comes to debt funds, AUM plays a much more important role than factors. It will be much easier and sensible to spread the fund expenses across the investors if you have a bigger AUM. As mentioned above, the expense ratio reduces considerably if the AUM is more and hence having a bigger AUM in debt funds, the investors do not have to pay too much expense ratio. It also helps in negotiating reasonable rates with debt issuers.
In Small-cap funds, you can see a restriction of cash influx after a certain point. We can see this when the assets under a mutual fund grow beyond a point. You must have seen how small-cap companies stick to funding from SIPs and avoid large investments because if such funds become a major shareholder in the company then the movement of that fund is no longer easy.
When it comes to large-cap funds, it is important to understand that it is not always about the amount of AUM a company has. A company with a lot more AUM could give you lesser returns and a company with lesser AUM can perform well and credit your better returns.
The bottom line is that Assets under Management does play a crucial role in making your investment choices, possible returns and overhead expenses. However, it is not the only factor that you need to focus on while investing or evaluating a company.
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