What is Asset Under Management (AUM)?

In investing, you often hear the term Asset Under Management or AUM. But what does it mean? Simply put, AUM refers to the total market value of the investments a financial institution manages on behalf of its clients. 

Understanding AUM (Assets Under Management) helps investors assess the performance of a fund or portfolio manager. Let’s explore this crucial concept.

Definition of Asset Under Management 

Asset Under Management (AUM) refers to the total market value of the investments that a financial institution or fund manager handles on behalf of their clients. It is the total worth of all the assets, such as stocks, bonds, real estate, and other investments, that the fund manager oversees.

When you invest money in a mutual fund, that money becomes part of the fund’s AUM. The fund manager then uses this pooled money to buy and sell investments to generate returns for the investors.

AUM is significant because it shows a fund’s size and health. A larger AUM often means the fund has more resources and can access better investment opportunities. It can also indicate that many investors trust the fund manager’s skills and judgment.

However, it’s important to remember that a significant AUM isn’t always better. Managing a vast amount of money can sometimes be challenging, and it might impact the fund’s performance.

In simple terms, AUM is a way to measure how much money a fund manager is responsible for managing, and it gives investors an idea of the fund’s scale and potential.

How to Calculate AUM?

To calculate Asset Under Management (AUM), you start by adding up the current market value of all the investments that a fund manages. These investments can include stocks, bonds, real estate, and other assets. 

For instance, if a fund has ₹50 lakh in stocks, ₹30 lakh in bonds, and ₹20 lakh in real estate, the total AUM is ₹ one crore. This value gives a snapshot of the total worth of all assets the fund manages.

AUM can change daily based on market prices and investor transactions. If the value of the investments increases or more people invest in the fund, the AUM will increase. 

Conversely, if the value of the investments drops or people withdraw their money, the AUM decreases. Monitoring AUM is essential because it helps fund managers and investors understand the fund’s size, growth, and overall health.

Example of AUM Calculation

Let’s say you invest ₹1,00,000 in a mutual fund, and your friend invests ₹2,00,000 in the same fund. This means the total amount invested by both of you is ₹3,00,000. The fund manager uses this money to buy assets like stocks and bonds.

After a year, the value of these investments grows. The stocks are worth ₹2,50,000, and the bonds are worth ₹1,50,000. 

To find the AUM, you add the current value of all these investments. 

So, ₹2,50,000 (stocks) + ₹1,50,000 (bonds) = ₹4,00,000. 

This ₹4,00,000 is the AUM of the fund. This example shows how AUM reflects the total value of assets managed by the fund.

Importance of AUM

Understanding the importance of Asset Under Management (AUM) can help you make better investment decisions. AUM not only reflects the size of a fund but also offers insights into its reliability and potential for growth. Here are some key reasons why AUM matters:

Indicator of Fund Size

AUM shows the total value of all assets a fund manages. A larger AUM often means the fund is well-established and trusted by many investors.

Investor Confidence

A high AUM suggests that many investors trust the fund manager’s ability to generate good returns. It reflects the fund manager’s reputation and performance.

Economies of Scale

More considerable funds with higher AUM can spread their costs over more assets, resulting in lower investor fees and a more cost-effective fund.

Access to Better Investments

Funds with higher AUM have more resources to access exclusive investment opportunities that smaller funds might need help to afford.

Attracts More Investors 

A significant AUM can attract more investors because it often signals stability and reliability. People tend to invest in funds that others trust.

Performance Insight

While AUM alone doesn’t determine performance, it helps gauge the fund’s capacity to handle significant investments and its overall market influence.

Fee Structure

Funds with larger AUM can negotiate lower fees and expenses, benefiting investors. Lower costs can lead to higher net returns for investors.

AUM and Expense Ratio

Asset Under Management (AUM) and Expense Ratio are two critical factors investors should consider when choosing a mutual fund or investment. Here’s how they relate:

The Expense Ratio is the fee a mutual fund charges to manage investors’ money. It’s calculated as a percentage of the fund’s AUM. For example, if a fund has an Expense Ratio of 1%, and its AUM is ₹1 crore, investors would pay ₹1 lakh annually as fees.

A higher AUM can often lead to a lower Expense Ratio because the fund’s costs are spread over a larger pool of assets. This means investors may pay less in fees, leaving more of their returns intact. 

However, if AUM decreases, the Expense Ratio could increase, potentially reducing net returns for investors.

Understanding the relationship between AUM and Expense Ratio helps investors assess the cost-efficiency of a fund. Lower fees can contribute to higher overall returns, making it crucial to consider both factors when evaluating investment options.

Differences Between AUM and NAV

Conclusion 

Understanding AUM is crucial for making informed investment decisions. It helps you assess the size, stability, and potential growth of a fund. By keeping an eye on AUM, you can better understand a fund’s performance and make smarter investment choices.

FAQs