What is Asset Under Management (AUM)? Know Meaning, Importance & Impact

Assets Under Management (AUM) refers to the total market value of investments that a financial institution or fund manager handles on behalf of clients. The AUM full form is “Assets Under Management,” and it plays a crucial role in evaluating a fund’s size, performance, and investor confidence. A higher AUM often reflects strong fund performance and greater investor trust.

What is an Asset Under Management?

AUM meaning refers to the total market value of all the assets, such as stocks, bonds, and other securities, that a mutual fund manages on behalf of its investors. Managеd by fund housеs, AUM signifiеs thе fund’s sizе and pеrformancе. Kеy factors influеncing AUM includе nеt flows, whеrе purchasеs surpass rеdеmptions, and capital apprеciation contributеs to growth.

AUM еncompassеs various assеts, indicating invеstmеnt quality and management. Although highеr AUM suggеsts bеttеr inflow and crеdibility, it doеsn’t guarantее supеrior rеturns. Largеr AUM may indicatе succеss, but smallеr schеmеs can offеr flеxibility and potеntially bеttеr rеturns. AUM’s significancе liеs in thе fund’s stratеgy and past succеss rathеr than еnsuring futurе pеrformancе.

Importance of AUM in Mutual Funds

AUM or Assets Under Management, reflects the total value of assets a mutual fund manages for its investors. It helps gauge the fund’s size, stability, and popularity.

• Investor Confidence: Higher AUM often indicates greater investor trust and fund popularity.
• Fund Liquidity: Larger AUM generally means better liquidity and smoother entry/exit for investors.
• Operational Efficiency: Bigger funds may benefit from economies of scale, reducing expense ratios.
• Performance Indicator: While not the sole metric, AUM can signal consistent fund inflows due to performance.
• Risk Management: A well-managed high AUM fund may offer better diversification and risk handling.

Average Assets under Management (AAUM) for the quarter of October – December 2023 (Rs in Lakhs) (source: https://www.amfiindia.com/research-information/aum-data/average-aum)

How to Calculate AUM (Assets Under Management)

AUM represents the total market value of all the investments a fund or institution manages on behalf of clients.

Formula: AUM = Current Market Value of All Holdings + Cash + Other Assets – Liabilities

• Equity Holdings: Value of stocks held.
• Debt Instruments: Bonds, debentures, etc.
• Cash & Cash Equivalents: Uninvested cash.
• Accrued Income: Dividends or interest earned.
• Liabilities: Any dues or payables deducted.

AUM changes daily based on market movement, investor inflows, and redemptions. 

Impact of High AUM on Mutual Funds

A high AUM (Assets Under Management) indicates strong investor confidence and fund performance but can also bring certain challenges.

Positive Impacts:

• Investor Confidence: High AUM often reflects a fund’s popularity and past performance.
• Economies of Scale: Larger funds may reduce expense ratios.
• Liquidity: Easier for fund managers to buy/sell securities without impacting prices.

Potential Drawbacks:

• Diminishing Returns: Managing very large funds can reduce agility in stock selection.
• Deployment Pressure: Fund managers may struggle to efficiently deploy large inflows.
• Style Drift: The fund may shift from its original investment style to manage scale.

Relationship Between AUM and Expense Ratio

As the AUM (Assets Under Management) of a mutual fund grows, the expense ratio generally tends to decrease.

• Economies of Scale: Higher AUM spreads fixed operational costs over a larger asset base, reducing per-unit costs.
• Lower Expense Ratio: Fund houses may reduce the expense ratio to attract more investors when AUM increases.
• Efficient Fund Management: Larger AUM allows better negotiation on transaction costs and services, improving efficiency.

However, an extremely large AUM can sometimes make it harder to manage the fund actively, affecting performance.

Difference Between AUM and NAV

AUM (Assets Under Management) and NAV (Net Asset Value) are key metrics in mutual funds but represent different concepts:

Conclusion

AUM plays an important role in understanding the overall strength and stability of a mutual fund. It reflects the fund’s size, investor confidence and the manager’s ability to handle market movements. While a higher AUM can offer benefits such as better liquidity and lower expense ratios, it does not guarantee superior returns. What matters more is how efficiently the fund manager uses the available assets to deliver consistent performance. By looking at AUM along with factors like the fund’s track record, investment style and expense ratio, investors can make better decisions and choose funds that match their financial goals.