Assets Under Management (AUM) is a term used to describe the total market value of assets that a financial institution or investment advisor on behalf of one or more clients.
The exact definition of AUM varies by the firm; some include bank deposits, mutual funds, and cash in their computation, while others only include discretionary funds that investors have given an advisor to trade on their behalf.
AUM varies due to changes in market performance in the value of the assets handled. Are you curious to know everything about Asset Under Management? Read further.
What is an Asset Under Management (AUM)?
Assets Under Management (AUM) is the market value of all the investments (assets) owned by a mutual fund. The fund manager manages these assets and makes all investment-related decisions on behalf of the investors.
This includes the cash available to make new investments and the returns on investment produced by a mutual fund.
AUM serves as a measure of the size and performance of a particular fund company. Positive mutual fund performance, new clients purchasing additional funds, or a combination of both could be indicated by an increasing or higher AUM.
On the other hand, decreasing AUM is a sign of underperformance or a high level of unit redemption by the customers. The fund’s performance might or might not be related to the latter.
The AUM value also comprises the returns earned by a mutual fund. A fund manager may invest it in securities, distribute dividends to investors, or hold it according to the investment instructions.
Factors to Consider about AUM Before Investing in Mutual Funds:
Before making a mutual fund investment, investors should be aware of several key factors about AUMs, including:
The Importance of AUM Size:
Investors must remember that size is relative when evaluating a mutual fund’s AUM. The size of an AUM depends on the benchmark against which it is being compared. An investor can assess a mutual fund’s performance by comparing its assets under management with those of similar funds rather than focusing on its absolute value.
Is AUM the Only Factor Influencing Fund Performance?
A large AUM does not ensure positive performance. Although it should be considered before investing, a fund’s AUM should not be the primary factor in the decision.
Additional Performance Indicators:
AUM should be considered with other indications, such as the fund’s past performance compared to its competitors, market cycles, etc. It is also necessary to consider the fund’s expense ratio, the fund manager’s track record, risk management measures, risk ratios, etc.
The AUM of a mutual fund house does not always directly affect that house’s performance. Several factors determine the performance of a fund house.
Importance of AUM for Different Fund Types:
The importance of the AUM regarding various investment options is as follows:
Equity Funds:
Since the performance of an equity fund is mostly influenced by the fund manager, it is less dependent on the asset being managed. There is no doubt that the returns of the fund can either be low or high depending on the decisions taken by the fund manager based on the market conditions.
Debt Funds:
Asset under management is a factor that investors must pay attention to if they invest in debt funds. A debt fund that manages more assets might distribute its fixed fund expenses among its investors. This finally results in a decreased expense ratio and a higher return for the investor.
Large-Cap Funds:
Investors typically wish to put their money into funds with more assets under management. It depends on several variables whether a bigger AUM turns into higher returns. Large-cap funds’ performance is more influenced by yield than by assets under management.
A large-cap fund invests only in 100 companies, but these 100 companies have a lot of liquidity. A large-cap fund may therefore be able to manage a large AUM.
Mid-Cap Funds:
A mid-cap fund has a smaller AUM capacity than a large-cap fund. Regarding market capitalization, midcap companies range from 101 to 250.
Small-Cap Funds:
AUM has no impact on small-cap funds. The majority of these funds use a SIP model rather than lump-sum investments. This is to prevent the fund from becoming a significant shareholder.
The Impact of High AUM on Mutual Funds:
The fund size or assets generally do not affect mutual fund performance. The behavior of various mutual fund types varies as assets under management increase.
The fund manager’s skill set, who makes the right judgments at the right time when entering or leaving a mutual fund, makes the fund perform well. Even in volatile markets, a fund manager delivers positive returns through expertise.
How to Calculate AUM?
Fund companies use various methods to calculate the assets included in the management formula. A fund’s total investment will increase when it consistently produces strong returns. AUM may increase due to successful results that bring in new assets and investors.
Likewise, the value of assets can be reduced by changes in market value or investment performance. Investors who redeem their stakes or the fund closes unexpectedly have the same consequences. The shares of the company’s leaders and capital invested across the company’s goods are categorized as assets under management.
Effect of AUM on Expense Ratio:
All mutual fund companies charge a fee known as an expense ratio. Management fees and operational costs are included in the expense ratio. These are based on the size of the fund. AUM plays a major role in determining a mutual fund’s management fees.
Since expense ratios and mutual fund fees are calculated as a percentage of AUM, higher AUM corresponds to higher costs, and lower AUM corresponds to lower costs. The Securities and Exchange Board of India has specified a maximum expense ratio that mutual funds may charge based on AUMs.
SEBI has established the following maximum expense ratio,
For equities mutual funds:
- For the first Rs. 100 crores – 2.5%
- For the following Rs. 300 crores – 2.25 %
- For AUMs greater than Rs. 300 crores – 1.75%
For debt mutual funds:
- The permitted expense ratio is 0.25% lower than for equity funds.
What Effect Do Market Expectations Have on AUM?
The current market conditions affect the assets under management by mutual funds. When the market is rising, returns will increase, and losses will occur when the market is falling. The value of the asset fluctuates along with the market rise and fall.
The change in asset value is related to the change in the AUM of management companies. This also impacts the mutual fund fee. In general, reduced costs correspond to lower value.
For example,
A mutual fund plan has received a total of Rs 20,000 from 50 investors. The mutual fund program generated a 10% return. Here, Rs 22,000 will be the asset under management for the mutual fund scheme.
On the other hand, suppose the mutual fund scheme’s return is 1%. In this case, Rs 20,200 will be the AUM for the mutual fund scheme.
Conclusion:
Assets under management (AUM) is the term used to describe the total market value of the investments that an individual or a company manages on behalf of investors. AUM changes daily based on the inflow and outflow of funds as well as the performance of asset prices. A fund’s management costs and expenses are frequently calculated as a percentage of AUM.
Investors should consider how well a mutual fund manages its assets when evaluating investing options. AUM can indicate how popular a mutual fund is, but it should not be the only factor in making an investment decision. It is equally important to consider other factors, such as the fund manager’s experience, the mutual fund’s strategy, etc.