You might have read a lot about mutual funds through our other posts. But, this time we thought of sharing a principal concept related to mutual funds: Assets under Management or AUM.
AUM Full Form & Meaning
AUM stands for Assets under Management. Mutual fund AUM is the total market value of funds and assets that are managed by an investment company of any financial institution (hedge firm, a mutual fund, venture capital firm, brokerage house, or private equity firm) on behalf of its partners, clients, depositors, investors, etc. Every company has its own formulas and definitions for AUM.
Simply put, AUM or Asset under management is the total market value of assets/capital that a mutual fund holds.
There are different things which are considered by different financial institutions. Some include mutual funds, bank deposits, and cash while calculating AUM. While others use funds under discretionary management, where responsibility is assigned to the company by the investor.
Indian Mutual Fund Industry Average Asset under Management (AAUM) for the month of March 2019 stood at 24.58 lakh crore.
To understand more about AUM, please read on.
Mutual fund AUM Break Down
Assets under management or AUM show how much money of an investor does an investor company or financial institution control. Investments are managed by a brokerage company, a venture capital or portfolio manager. The investments are contained in a hedge fund or mutual fund.
AUM stipulates the size of a fund. So, it may refer to the sum total of funds or assets managed for all the clients. It can also refer to the gross amount of assets managed for a single, specific client.
Let’s consider an example for better understanding of this concept.
Example: If an investor or client has Rs 10,000 in an investment portfolio, the Investment Company or portfolio manager can use this amount to buy or sell shares without taking permission from the investor.
AUM is a variable entity and fluctuates daily. It basically depends on two things:
- Asset performance and
- Flow of money of a specific fund in which a client has invested.
The fluctuations are also dependent on the market value of a fund and the company investments. If these factors vary, the AUM will fluctuate accordingly.
Hence, AUM decides what services the investor will receive from a brokerage company, financial advisor or financial institution. Many companies keep certain criteria pertaining to AUM. And, the fulfilment of these requirements determines if an investor is eligible for a particular type of investment. This is because some investments keep the criteria of minimum purchase which needs to be met.
How to calculate AUM?
There are various methods to calculate AUM and it differs for each company. It depends on various important factors.
- If the performance of investment increases or if the investment company acquires new assets and clients, it may increase.
- If the performance decreases, it may decrease.
- It may also decrease due to client turnovers, withdrawals, fund closures, or redemption.
- Assets under management consist of investor capital. It may also include capital that is owned by the executives of the investment firm.
Many investment companies charge management fees from the investors. It is a fixed percentage of funds or assets under the management.
Hence, it is necessary for investors to recognize the procedure used by companies to calculate AUM. These assets under the management can be used by the investment company as a marketing tool to attract more customers.
Therefore, it indicates the dimensions of the company’s operative with respect to its competitors. However, there are other factors as well that help to determine the investment potential of the firm.
Do you like investing in mutual funds in India? What factors do you consider before making an investment in different financial instruments? Do let us know in the comments section.