WHAT IS ASSETS UNDER MANAGEMENT?
AUM i.e. Assets Under Management refers to the market value of the assets a financial institution has rights and discretion over. Increasing AUM is the first and foremost goal of most mutual funds, brokerage firms and financial advisor firms, and many will use a high AUM as a selling point when marketing themselves to potential investors. How certain institutions calculate or define their AUM can differ. So it is significant to understand these variance before you use a firm’s AUM to make any type of decision.
MEANING AND UNDERSTANDING
While some institutions have differing ways of formulating it, AUM is the value of the investment that some entity is in charge of and managing the same, typically on behalf of the investors of multiple clients.
Where institutions most frequently differ is regarding which specific investment should be included in the calculation of AUM. As a general rule, AUM refers only to the values of those funds that are directly in control or managed and invested on their client’s behalf. Some money managers also include specific mutual fund units and client bank accounts in their calculation since they advise clients on how much funds to keep in the bank and how much to invest in mutual funds. This is sometimes called an assets under advisement.
Generally when we hear about AUM, it is referring to the entirety of the assets that broker or advisor is managing. We might also hear our advisor use the term to signify the value of the investment they are managing for you alone. This is often the case when discussing financial advisor fees, for instance. An advisor may charge upto 2% of your AUM for the services. That is not referring to all of the assets. Rather, it refers to the assets you have placed in their care and supervision.
WHY AUM MATTERS?
Different financial institutions have different methods of calculating AUM. Some of these differences are structural - one mutual fund will calculate differently than an advisory firm. Some as well are based on preference. For instance, some institutions will have a broad definition of which asset they will count as per their discretion. This is not to say firms have total control on how they define AUM. The SEC also has rules that narrow down what can and cannot be included.
When it comes to calculating AUM actually, some sort of portfolio management software will do the work for now. Where it may have involved a fair bit of manual numbers punching in the past, computers handle calculating value and adding it all up now. Large mutual funds specially are constantly updating their AUM, which they may also call net assets.
Because the AUM calculations involve determining the market value of assets, any institution’s AUM will naturally fluctuate on a daily basis. This is because the value of investments like stock equity will fluctuate on a daily basis. This is because the value of investments like equity shares will fluctuate with the respective stock price. A mutual fund can start the day at Rs 5,000 Crores and might end at Rs 5,020 Crs or Rs 4,980 Crore, simply because the assets which exist are volatile and may increase and decrease in terms of value.
NAV VS AUM
NAV refers to Net Asset Value which is the total value of the assets subtracted by all the liabilities of a fund. It is often shown on a per share basis. NAV shows the price point at which one share or unit of a fund can be traded. On the other hand, AUM refers to the sum total value of assets a firm is managing under it. Unlike NAV, AUM is not expressed on a per share basis.
While making investments, it is advisable to focus on the AUM. It inculcates all the assets of a mutual fund as well as the cash held. While NAV is the price per unit of a fund. A bigger AUM signifies a huge client base, increasing trust of the fund. AUM is also a measure of liquidity. A huge AUM acts as a cushion in case there is a bigger redemption especially in overnight and liquid funds. These funds are usually sensitive to larger redemptions by institutional investors. For such funds, a higher AUM means a good ability to absorb shocks and uncertainties.
THE CRUX
AUM can mean slightly different things depending on the context in which you see it. It can refer to the value of total investment in a fund, the market value of assets a financial advisor controls or the sum of funds you have invested in a firm. Further, AUM can sometimes be helpful in determining the reputation of a financial institution. Nevertheless, it is best to refrain from using that as the one and only factor for review.
