AUM Full Form Asset under management and a popular term you may have come across in the investment world. But do you know what it means?
AUM refers to the total market value of investments a financial institution manages on behalf of its clients. It includes assets like stocks, bonds, real estate, and more. AUM is a crucial metric for investors as it provides insights into the scale and growth of a financial firm.
While AUM can indicate the success and expertise of an investment manager, it’s important to note that there are also limitations to consider. Understanding AUM is key to making informed investment decisions.
In this article, we will understand all we need to know about AUM before making any investment.
What Is Assets Under Management?
The assets under management definition is the market value of the assets that an institution, fund, or individual is managing for clients. It also describes the total market value of those assets and the returns that a fund has made on its investment.
In its simplest form, AUM is a number that denotes the current total value of all assets held. There are many ways to calculate AUM and it is important to note that there is no “standard” AUM calculation, as the preferred method differs from country to country and from business to business.
Importance Of AUM
AUM is an important metric to evaluate the success of a financial institution. Here are some of the reasons why AUM is so important:
The primary source of revenue for most financial institutions is the fees they charge for managing their client’s assets. The higher the AUM, the more revenue a firm can generate. As a result, financial institutions with larger AUMs are more profitable and have more resources to invest in research and development.
AUM is a crucial factor in determining the size and scale of a financial institution. A firm with a large AUM is considered more established and reputable than a smaller firm. This reputation can help the firm attract new clients, expand its services, and grow its business.
AUM is also an important metric used to evaluate the performance of a financial institution. The higher the AUM, the more successful the firm is considered to be. It also indicates the firm’s ability to effectively manage its clients’ assets.
AUM is a commonly used metric in the financial industry, allowing firms to benchmark themselves against their competitors. This benchmarking can provide valuable insights into industry trends, best practices, and growth opportunities.
Calculation of Assets Under Management
Fund houses use different ways to calculate the AUM. A fund’s AUM is a function of three variables: inflows, outflows, and market price. At any point in time, both inflows and outflows are happening, so one can also see the net flows (inflows minus outflows). Positive net flows often (though not always) result in a rise in assets. A rise in the market price of the underlying asset can also result in a rise in AUM (again, not always).
If net flows are positive and the market price rises, the AUM will increase. If net flows are negative and the market price also falls, the AUM will decline. If one is positive and the other is negative, whichever is bigger in quantum will drive the AUM change.
AUM Considerations by Fund Type
The ideal amount of assets under management (AUM) varies depending on the fund’s scope and strategy:
Mutual Funds and exchange-traded Funds (ETFs)
Higher AUM are a signal of tactical interest for investors. Fund flows may be tracked to determine to which corners of the market investors’ capital is moving. Some funds focusing on specific industries may thrive during expansionary economic cycles, while others could be attractive at times when interest rates are rising.
The appropriate AUM level depends on structural considerations. Funds aim to build a large asset base that allows them to expand and enhance their operational capacity without jeopardizing profitability. They focus on creating economies of scale.
Excessive AUM growth can make it more difficult for managers to identify and execute profitable operations, as large deals are needed to generate positive returns on an ample asset base.
Private Equity Funds
The nature of the deals made by this type of fund, which often involves taking public companies private through buyouts, requires pooling a large asset base. However, the ideal AUM may be determined by the scope of the fund, as some private equity firms focus on small-cap companies rather than large corporations.
Strategies To Improve AUM Growth
To increase AUM growth, fund managers can apply several strategies. Let’s discuss some of them:
Fund managers can increase AUM by diversifying their portfolios. Diversification can reduce risk and attract a wider range of investors who are looking for a balanced investment portfolio.
Marketing and advertising
Fund managers can increase AUM by advertising and marketing their funds effectively. They can use various mediums such as social media, television, and print advertising, to reach potential investors and increase their AUM.
Fund managers can offer performance-based incentives to their employees to encourage better investment performance. This strategy can help increase the AUM by attracting more investors to the fund.
Fees can have a significant impact on AUM growth. Fund managers can lower their fees to attract more investors, leading to an increase in AUM.
Relation Between AUM and Expense Ratio
When managing your investment, a fund house imposes a charge that is a proportion of your investment. This charge, intended to cover the operational costs of the fund, is subtracted from the investment returns and forms part of the fund’s Total Expense Ratio (TER). This ratio varies depending on the fund’s AUM size, with larger AUMs requiring more resources for effective management.
In line with SEBI’s regulations, funds that have a larger scale of Assets Under Management are required to maintain lower TERs. Conversely, funds with smaller AUMs are permitted to levy higher expense charges. Refer to the following table for detailed information.
|TER for Equity Mutual Funds
|TER for Debt Mutual Funds
|First ₹500 crores
|Next ₹250 crores
|Next ₹1,250 crores
|Next ₹3,000 crores
|Next ₹5,000 crores
|Next ₹40,000 crores
|TER reduced by 0.05% for every ₹5,000 crores rise in AUM
|TER reduced by 0.05% for every ₹5,000 crores rise in AUM
|Above ₹50,000 crores
FAQ: AUM Full Form Asset Under Management
What is the ideal size of the AUM?
There’s no one-size-fits-all “ideal” AUM. It varies based on investment strategy and investor preferences, with some favouring larger AUM for stability and others smaller AUM for flexibility and growth potential.
What is included in assets under management?
Assets under management include all the assets that a financial institution, fund manager, or wealth manager manages on behalf of its clients. This includes money invested in stocks, bonds, cash, real estate, and other investment vehicles.
What happens when AUM increases?
When AUM rises, it means that the financial institution or fund manager is managing more money on behalf of its clients. This can lead to increased revenue for the financial institution, as expenses are charged on the AUM. A rise in AUM is often an indication of investor trust and confidence as well. If a fund does well, more investors want to invest in it.
Understanding and effectively managing assets under management (AUM) is crucial for any individual or organization in the financial industry. Whether you are a financial advisor, an investment manager, or simply an investor, knowing the ins and outs of AUM can greatly impact your financial success.
From calculating AUM to considering the different factors that can affect it based on fund type, this blog has provided a comprehensive overview of everything you need to know about AUM. By grasping these concepts and applying them to your financial strategies, you can make more informed decisions and maximize your investment potential.
Founder of Sustvest
Hardik completed his B.Tech from BITS Pilani. Keeping the current global scenario, the growth of renewable energy in mind, and people looking for investment opportunities in mind he founded SustVest ( formerly, Solar Grid X ) in 2018. This venture led him to achieve the ‘Emerging Fintech Talent of the Year in MENA region ‘ in October 2019.