What Is Asset Under Management (AUM)?
The total market value of the investments that a person or organisation manages on behalf of clients is known as assets under management (AUM). Companies use different definitions and calculations for assets under management. Several financial organisations factor cash, mutual funds, and bank deposits into their calculations of AUM. Others restrict it to funds that are managed at their discretion, in which case the investor gives the business permission to execute trades on their behalf. AUM is merely one factor that is considered when assessing a business or investment, overall. It is frequently taken into account together with management experience and performance. Investors, however, frequently view bigger investment inflows and AUM comparisons as a sign of quality and management expertise.
Impact of High AUM on Mutual Funds
The performance of Mutual Funds as measured by Assets Under Managed has a considerable impact on the financial market. It mostly depends on the fund houses; these businesses favour asset-rich enterprises since their clients favour them more. According to studies including 361 distinct equity funds in 2012, an AUM of less than Rs. 100 Crore was held by about 170 funds, of which 68% had AUM of less than Rs. 50 Crore. The total investment, however, was seen to increase from Rs. 530 crore in 2008 to Rs. 3841 crore in 2012. It demonstrated the possibility of the enormous expansion of Assets Under Managed for many organisations. A sizable asset fund might enable an asset manager to respond to shifting market possibilities by withdrawing or entering a specific venture when one presents itself. AUM is frequently used by investors to calculate performance and returns.
Importance of Asset Retention for Mutual Funds
Mutual funds are often long-term investments that are supposed to weather temporary ups and downs in the market. However if the fund keeps changing its asset composition then questions can be raised on whether the fund manager did the due diligence on the asset to begin with. Furthermore, buying and selling assets within a mutual fund, especially if they are not short term instruments (as int he case of overnight funds), may cause the funds to incur additional costs, thereby increasing their expense ratio.
Importance of AUM for Mutual Funds
Equity funds –
In a perfect world, equities funds would provide a positive return and outperform the benchmark index during market highs and lows. Equity funds rely more on the asset manager’s ability to increase returns than they do on AUM. Total assets are one of the most important components of debt funds. Debt funds with more capital can distribute their costs across more participants, lowering fixed fund expenditures for each investment and raising returns.
Small-cap funds –
In general, small-cap funds do not rely heavily on assets under management. They only become a factor when the assets exceed a certain threshold, specifically when fund firms become the largest owners in a certain company. Small-cap funds frequently forego determining AUM and invest in SIPs rather than making bigger commitments. Also Read What are Small Cap Funds
Large-cap funds –
The profits from the market’s yields are what large-cap funds rely on the most. Generally speaking, it is independent of the asset under management. When compared to organisations with greater assets, there are multiple instances where companies with smaller asset classes have generated much more revenues. It should be noted that larger returns generated by the corresponding Mutual Funds are not always correlated with higher asset values under management. The skill of the concerned portfolio manager and his capacity to achieve a competitive edge through well-informed predictions and wise investment decisions determine the performance of mutual funds. Also Read What are Large Cap Funds
Importance of AUM for Mutual Funds
- Indicates fund size
Assets under management (AUM) reflect the scale and size of a mutual fund. A higher AUM often indicates strong investor confidence and suggests the fund’s stability and popularity. It also helps prospective investors gauge the fund’s ability to attract and retain investors, showcasing its credibility in the market.
- Influences fund performance
The size of the AUM can directly impact a mutual fund’s performance. Larger funds may struggle to find sufficient high-return investment opportunities without affecting the broader market. This can lead to challenges in sustaining high returns. On the other hand, smaller funds often have greater flexibility, enabling them to invest in niche or undervalued opportunities, which may yield higher returns.
- Impacts fees and accessibility
AUM plays a crucial role in determining the fees associated with a mutual fund. Larger funds may impose higher minimum investment thresholds, limiting access for smaller investors. Additionally, management fees may vary based on the fund’s size, influencing overall costs for investors.
AUM and Expense Ratio
The entire amount taken out of mutual fund returns is used to control smooth operations and make sure the funds are properly managed and administered. The expense ratio incurred, unique to each Mutual Fund, refers to these outlays. The expense ratio of a certain fund is influenced by the AUM since better administration of larger portfolios necessitates more time and effort. As a result, AUM and the expense ratio charged by mutual funds are directly related, suggesting that investing in mutual funds with a substantially bigger size will result in greater fees. However, according to SEBI standards, a mutual fund’s expenditure ratio must be precisely lower than its AUM.
Calculating AUM
An individual fund house may have a different method for calculating AUM. It often increases when an investment generates a steady, positive return over time. Good performance brings in more resources and investments, increasing the organisation’s overall asset base. The asset’s value does, however, decline each time the market falls or an investor redeems their shares. Depending on the market performance of the portfolio assets, the total value of assets under management changes constantly. At the conclusion of trading, when the market closes for the day, the net changes in the value of AUM are reflected. All investors need to know the asset management company’s overall valuation in order to calculate the rate of return on their investments in such mutual funds.
Difference Between AUM and NAV
1. Definition
AUM refers to the total market value of all assets held in a mutual fund, including stocks, bonds, and cash. NAV is the per-unit value of a fund, calculated by dividing the market value of securities by the total number of units on a specific date.
2. Calculation frequency
AUM fluctuates based on the performance of the fund’s underlying assets and market conditions. NAV is computed daily at the end of the trading day, reflecting asset performance.
3. Purpose
AUM helps investors assess the overall size and scale of a mutual fund, offering insights into its market credibility. NAV determines the buying and selling price of a fund’s units and is crucial for tracking investment value.
Conclusion
Market swings have a significant impact on the assets managed. The assets of the fund will increase when it generates returns and decrease when it suffers losses. This impacts the mutual fund fee as well. Lower expenses typically equate to lower value. For instance, let’s imagine that a mutual fund that has produced 10% returns has received a total investment of Rs. 10,000 from 100 investors. If so, Rs. 11,000 would be the fund’s AUM. After all is said and done, businesses determine the worth of the assets they manage using a variety of techniques. AUM is a great way to evaluate a fund’s popularity and performance, to put it briefly. Therefore, it shouldn’t influence whether or not you decide to invest. If you are interested in trading stocks or investing in mutual funds, open demat account with Angel One today!
FAQs
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?
AUM includes all types of investments managed on behalf of clients – stocks, bonds, real estate, mutual funds, cash, and accrued earnings like interest and dividends.
How does AUM affect fund performance?
Higher AUM can indicate investor trust and allow for more diversified portfolios, potentially enhancing fund performance due to economies of scale and greater investment opportunities.
What happens if AUM is high?
If AUM is high, it can lead to increased market influence and negotiation power for better terms. However, it might also result in reduced flexibility and potential difficulties in maintaining high returns as the fund grows larger.
What is the difference between AUM and market cap?
AUM is the total value of managed assets by a financial institution, while the market cap is the total value of a company’s shares in the stock market (stock price multiplied by the number of shares).
