Asset Under Management
What is Asset Under Management?
Assets under management are the total asset/capital market value held by a mutual fund. The fund manager handles these funds and on behalf of the investors, takes all investment-related decisions. The AUM figure helps in understanding the fund’s size and performance. Assets Under Management is also known as Funds Under Management.
A rising AUM indicates a high level of trust in the fund as more clients are deemed to have bought into the fund or older clients remain invested. A declining AUM suggests the reverse: bad results or a significant redemption that may or may not be related to the performance of the fund.
In terms of benefit to the fund management team, a higher AUM enables the fund manager to take tougher calls with regards to the entry and exit strategy. This is owing to the availability of funds in case of higher redemptions, and also the trust portrayed by investors.
The expense ratio charged by asset management companies is calculated as a percentage of the assets under management.
Importance of AUM
AUM though not the most important factor to consider while selecting a fund, can be an important factor nonetheless. A higher AUM generally implies that the fund has enough liquidity to wade through the tough times and meet redemption requests in case of pressure.
In some cases, a higher AUM can also have a negative impact on the performance of the fund. For instance, in the case of a small-cap fund, a very large AUM can sometimes be detrimental. In case of not enough opportunities to be able to deploy all of the assets, one of two things would happen. Either the fund manager would need to keep the excess funds in money market instruments, thereby dragging the overall portfolio return lower. Or as a second option, the fund manager would need to invest the funds in riskier assets, which is even worse.
For listed asset management companies, the AUM also helps analysts discover the company's stock valuation.
All in all, from the investors perspective, the AUM figure can provide a good indication about the credibility of the asset management company or fund manager.
Calculation of AUM
In a mutual fund, there are numerous ways of measuring the AUM. Put simply, if a mutual fund scheme generates stable returns for a number of years, the AUM rises significantly. This rise in AUM is normal as investors' wealth increases not only due to higher income produced by the scheme, but also because new investors are drawn by such efficient performers.
When it comes to determining the management fee, AUM is most important. In proportion to the fund size, all fund houses charge a premium, called the expense ratio. The expense ratio covers the expenses of administration and operations. The upper limit of such expense ratios for mutual funds, which is a proportion of the AUMs, has specifically been mentioned by the Securities and Exchange Board of India (SEBI).
5 Largest AMCs in Terms of AUM
|Asset Management Company (AMC)||AUM (in cr.)*|
|SBI Mutual Fund||4,22,122.96|
|HDFC Mutual Fund||3,76,379.10|
|ICICI Prudential Mutual Fund||3,68,697.71|
|Birla Sun Life Mutual Fund||2,39,028,96|
|Nippon India Mutual Fund||2,01,301.77|
*data as of Q2 - 30/09/2020
5 Largest Funds in Terms of AUM
|Fund Name||AUM (in cr.)*|
|HDFC Liquid Fund||64,687.28|
|SBI Liquid Fund||50,427.05|
|ICICI Prudential Liquid Fund||40,246.63|
|HDFC Balanced Advantage Fund||34,716.21|
|Aditya Birla Sun Life Liquid Fund||34,021|
*data as of 31 October 2020