Asset under Management

Asset under Management (AUM) refers to the total market value of the investments or assets that a financial institution or individual manages on behalf of clients. AUM is a key metric used in the financial industry to measure the size, growth, and success of an asset management firm, hedge fund, or investment advisor. AUM can increase due to asset appreciation or inflows from new investors, and decrease due to asset depreciation or withdrawals. A larger AUM can give a firm more influence in markets, as their investment decisions can significantly impact asset prices.

What is Asset under Management?

Assets under Management (AUM) is the total market value of the financial assets that a financial institution or individual manages on behalf of clients. AUM is often used to gauge the size and effectiveness of an investment management company or financial advisor. Many investment firms charge management fees as a percentage of AUM. A larger AUM typically results in higher revenues for the firm.

Understanding Asset under Management

AUM consists of money invested by clients in mutual funds, hedge funds, pension funds, or individual accounts. These can include equities (stocks), fixed income (bonds), real estate, commodities, and other financial instruments.

Fluctuations:

The value of AUM changes with the rise and fall of asset prices. AUM increases when new investments come in (inflows) and decreases when clients withdraw funds (outflows).

Importance of AUM:

A larger AUM suggests that a firm has attracted more clients and assets, making it an indicator of the firm’s market presence and success. Firms often charge fees based on AUM. For example, investment management companies typically take a percentage of AUM as their annual management fee. Firms with higher AUM are often perceived as more reliable or established, which can attract more clients.

Applications of AUM:

AUM helps potential investors compare the scale and capacity of various firms, funds, or advisors. Large firms managing substantial AUM may face higher regulatory oversight and reporting requirements

Calculation of Asset Under Management

Calculating Asset Under Management (AUM) follows the same process as in other currencies. Here’s a step-by-step breakdown of how to calculate AUM in Rupees:

Steps to Calculate AUM in Rupees:

1. Identify the assets:

List all the assets that the firm or advisor manages, such as:

• Equities (stocks)
• Fixed income (bonds)
• Real estate
• Mutual funds
• Cash and equivalents

2. Determine the market value:

• For assets traded on Indian markets (like stocks listed on the BSE or NSE), use the current market prices in Rupees.
• For foreign assets, convert their value into Rupees using the prevailing exchange rate.

3. Adjust for inflows and outflows:

• Add any new contributions (inflows) and subtract withdrawals (outflows) from the clients. This ensures the AUM reflects the latest position of the assets under management.

4. Sum up the values:

• Add the Rupee-denominated values of all individual assets to get the total AUM in INR.

Example:

Suppose a firm manages the following assets:

• Indian stocks worth ₹500 crore
• Bonds worth ₹300 crore
• Real estate worth ₹200 crore
• Cash equivalents worth ₹50 crore

Additionally:

• New investments from clients (inflows): ₹100 crore
• Client withdrawals (outflows): ₹20 crore

Total AUM Calculation in Rupees:

AUM= (₹500 crore+ ₹300 crore+₹200 crore+₹50 crore) +₹100 crore−₹20 crore

AUM= ₹1050crore+₹100crore−₹20crore

AUM =₹1130crore

Importance of AUM in Mutual Fund

Assets Under Management (AUM) plays a crucial role in the mutual fund industry as it directly influences the fund’s size, stability, performance potential, and appeal to investors. Here’s a breakdown of the importance of AUM in the context of mutual funds:

1. Indicator of Fund Size and Success:

• AUM represents the total value of assets that the mutual fund manages on behalf of investors.
• Large AUM: Typically indicates that the fund has been successful in attracting a significant number of investors, boosting its credibility and reputation.
• Small AUM: A smaller fund might still be growing, or it could suggest that it hasn’t gained enough market traction yet.

2. Economies of Scale:

• Larger AUM allows mutual funds to benefit from economies of scale. The fund can negotiate better fees for transactions and reduce operational costs (e.g., brokerage fees), which can improve net returns for investors.
• Cost Efficiency: Funds with higher AUM can spread fixed operational costs over a larger asset base, potentially reducing the expense ratio (fees as a percentage of assets), which benefits investors.

3. Liquidity and Flexibility:

• High AUM funds tend to have better liquidity, meaning they can easily meet redemption requests from investors without impacting the portfolio’s performance or selling assets at unfavorable prices.
• Smaller AUM funds may face challenges in managing liquidity, especially during market downturns, when many investors seek to redeem their investments simultaneously.

4. Impact on Fund Performance:

• Larger AUM can sometimes restrict a fund’s ability to be nimble. For example, a large equity mutual fund may struggle to invest in smaller-cap stocks, as the size of its trades could significantly affect stock prices. This can lead to diluted performance compared to smaller funds that can invest more flexibly.
• However, well-managed funds can still generate solid returns, despite large AUM, by focusing on diversified, large-cap investments.

5. Investor Confidence and Attraction:

• Larger AUM tends to attract more investors. It is often seen as a sign of stability and investor confidence, as it indicates that a large number of people trust the fund’s management and investment strategy.
• Smaller AUM funds might have more difficulty attracting new investors, as they can be perceived as riskier or less established.

6. Fee Structure and Revenue Generation:

• Mutual funds typically charge management fees based on a percentage of the AUM. A higher AUM results in more revenue for the fund management company, even if the fee percentage remains constant.
• For investors, a lower AUM fund may charge higher expense ratios to cover operational costs, while larger funds may offer lower expense ratios due to higher AUM.

7. Regulatory Oversight:

• Larger mutual funds with substantial AUM are often under stricter regulatory scrutiny. They may face additional reporting requirements and compliance measures from regulatory authorities like SEBI (in India).

8. Marketing and Fund Ratings:

• Mutual funds with larger AUM often receive better ratings from rating agencies (like Morningstar), which makes them more appealing to investors.
• Smaller AUM funds might not receive the same level of attention or positive ratings, even if they have a good track record, simply because size is often a key factor for rating agencies.

Impact of AUM in Mutual Fund

The Assets Under Management (AUM) of a mutual fund has a significant impact on various aspects of the fund’s performance, operations, investor appeal, and management. Below are the key ways in which AUM influences a mutual fund:

1. Impact on Performance:

• Larger AUM: While a large fund size can indicate success, it can also become challenging to maintain high returns. Managing larger pools of capital requires investing in more liquid and larger-cap assets, which can limit the fund’s ability to invest in high-growth, smaller opportunities. It can also slow down decision-making, as buying or selling significant amounts of assets can move markets, affecting prices.
• Smaller AUM: Funds with smaller AUM can be more agile and invest in niche markets or small-cap stocks that larger funds might avoid. This agility can lead to higher returns, but also increases risk due to limited diversification.

2. Liquidity and Redemption Management:

• Higher AUM: Larger mutual funds generally have more liquidity, making it easier to handle large redemption requests from investors without needing to sell assets quickly at unfavorable prices. This is especially important during periods of market volatility when many investors might want to redeem their holdings.
• Smaller AUM: Smaller funds may face challenges in maintaining liquidity, particularly if they experience sudden large redemptions. This could force them to sell assets quickly, which can hurt the fund’s performance.

3. Expense Ratio and Fees:

• Economies of Scale: As AUM grows, mutual funds benefit from economies of scale, spreading fixed costs over a larger asset base. This usually leads to a lower expense ratio (the cost of managing the fund as a percentage of AUM), which is beneficial for investors as it means more of their money is invested rather than going to fees.
• Smaller AUM: Funds with smaller AUM often have higher expense ratios because their fixed costs (administration, management, marketing) are spread across fewer assets, making them relatively more expensive for investors.

4. Impact on Investment Strategy:

• Large AUM: Large mutual funds may find it difficult to invest in smaller, high-growth companies or illiquid assets, as their large trades could significantly affect prices or market liquidity. For example, a large equity fund might avoid investing in small-cap stocks, even if they offer higher growth potential, because buying or selling large quantities of shares could significantly move the price, impacting the fund’s overall performance.
• Smaller AUM: Funds with smaller AUM can be more nimble and may have more flexibility to take positions in smaller or less liquid securities. This can offer the potential for higher returns but comes with increased volatility and risk.

5. Investor Confidence and Attraction:

• Larger AUM: A large AUM often instills confidence in investors because it suggests that many others have trusted their money with the fund. It can be seen as a sign of stability, past success, and reliability. New investors may be more likely to choose a large AUM fund because of this reputation.
• Smaller AUM: Investors may perceive smaller AUM funds as less established or more risky, which can make it harder for the fund to attract new capital, even if it has a solid performance history.

6. Market Influence:

• Larger AUM: Large mutual funds can exert significant influence on the market. For example, when a large fund buys or sells substantial amounts of a stock, it can move the stock’s price due to the sheer size of the trade. This can be both an advantage and a disadvantage. Large AUM allows the fund to exert influence, but it also means the fund must be more careful with its trades to avoid adverse price impacts.
• Smaller AUM: Smaller funds have less market influence and can trade without significantly moving prices, giving them more flexibility in managing portfolios.

7. Risk Management:

• Diversification: Larger AUM allows funds to better diversify their portfolios across a wider range of assets and sectors, reducing the risk of overexposure to any single investment. This diversification can make the fund more stable and less vulnerable to market fluctuations.
• Concentration Risk: Smaller funds with lower AUM might face concentration risk, where they are forced to hold larger positions in fewer stocks or assets. While this can lead to higher returns if those investments perform well, it also increases the risk if those few investments perform poorly.

8. Attracting Institutional Investors:

• Large AUM: Institutional investors (such as pension funds, insurance companies, and endowments) often prefer funds with large AUM because they perceive them as more stable and better suited for large investments. AUM size can be a factor in meeting the criteria of institutional investors’ due diligence.
• Small AUM: Small AUM mutual funds may struggle to attract institutional investors due to concerns about liquidity and scalability.

9. Regulatory Scrutiny:

• Higher AUM funds are often subject to stricter regulatory oversight due to the larger number of investors and higher capital involved. Regulatory bodies like SEBI (Securities and Exchange Board of India) or the SEC (Securities and Exchange Commission) may impose stricter rules on large funds, which could affect their operational flexibility.
• Smaller AUM: Smaller funds may not face as much regulatory scrutiny, which could give them some operational flexibility, but they might still need to comply with basic regulatory standards.

10. Fund Mergers and Closures:

• Declining AUM: If a mutual fund’s AUM falls significantly, it may become financially unsustainable to operate due to high fixed costs. This can lead to fund closures or mergers with larger funds, which can impact investors, who may have to find alternative investment options.
• Growing AUM: On the other hand, strong growth in AUM can encourage the fund manager to launch new funds, diversify product offerings, or expand into new markets, benefiting both the fund company and its investors.