You might be wondering, What does AUM stand for?
The AUM acronym stands for “Asset under management”.
Asset under management means the total market value of the assets that a financial institution, mutual fund or an entity manages on behalf of one client or many. In other words, it refers to the value of money the mutual fund or the entity manages for their clients. It is also referred to as AUM or funds under management.
AUM quantifies how much money or securities a fund house or financial institution manages for its clients.
A financial institution such as mutual funds manage a variety of financial securities on behalf of their clients. AUM describes the total value of those assets managed by the mutual fund.
AUM can be calculated for a particular scheme or for the entire mutual fund. In this way investors will come to know the size of the mutual fund or financial institution.
Under management means, assets are managed on behalf of its owners.
For instance, suppose XYZ mutual fund has a diversified portfolio invested in stocks and bonds. Let’s suppose that XYZ mutual fund’s portfolio consists of Rs 1,500 Crore in stocks and Rs 200 crore in bonds and Rs 25 Crores in cash. It means the total value of the fund’s asset under management is Rs 1,725 Crore. If you have invested Rs 1,00,000 in a mutual fund, then the market value of your fund becomes part of the total assets under management by that mutual fund.
The calculation of AUM is almost similar to the calculation of market capitalisation of stocks traded in the stock market.
Calculation of assets under management varies from company to company based on the type of industry in which they work.
Why is Asset under management important?
Here are the most important reasons why AUM is important.
A mutual fund calculates its management fees and expenses as a percentage of the asset under management. Management fees and expenses are charged to manage the fund for their clients.
AUM determines the strength of the company. Assets under management (AUM) is used as a marketing tool to attract new investors.
AUM of a mutual fund or entity is an indication of the size of a company’s operation relative to its competitors. For many companies such as banks, insurance companies, mutual funds, financial institutions, etc., AUM measures the size of the company’s success. It’s considered as a performance indicator of success.
A large AUM is generally correlated to higher revenue, prestige and management’s compensation. Therefore, higher AUM indicates better investment inflow, quality and strength of the fund house.
Why does the AUM of a mutual fund fluctuate?
As discussed above, the fund value of the asset under management changes based on how the market performs on a day to day basis.
If the market value of the stock decreases, then overall fund value comes down. Likewise the opposite is also true, when stock prices increase, the value of the fund goes up.
Investors in a mutual fund based on the market conditions may decide to increase or reduce their position of their investment by buying additional shares in the fund or by selling the ones they already own. This change in position will have a high impact on the overall fund value of the AUM.
When overall market sentiment is down, share prices decline. Due to this reason many investors might decide to either stop investing in mutual funds and redeem their existing investments, due to which the AUM of the mutual fund comes down. Likewise when the market sentiment is high, due to participation of more investors, the AUM moves higher.
Mutual funds might receive dividends based on their holdings in companies. If it is reinvested instead of distributing to the unit holders, then the fund value of the AUM increases as new money can buy additional shares of companies.
Due to all these factors the value of the AUM can change constantly.
Here is a list of major asset under management (AUM) companies in India
- Axis Mutual fund
- Kotak Mutual fund
- Nippon mutual fund
- HDFC mutual fund
- SBI Mutual fund
- ICICI Prudential mutual fund
- Aditya Birla Sunlife mutual fund
- UTI Mutual Fund
- Franklin Templeton Mutual Fund
- IDFC Mutual fund
How AUM is different from NAV?
NAV Stands for Net asset Value.
A mutual fund’s NAV should not be confused with the asset under management (AUM), as both are different.
Net asset value of a mutual fund is calculated by dividing the total net assets of the fund by the total number of units issued to investors. When as an investor you decide to buy and sell units of mutual funds, then this term comes up as at this price, shares in a fund can be bought and sold.
Total net assets is calculated by taking out liabilities out of total assets. The resulting figure is then divided by the total number of units issued.
For example, if the net market value of the securities of a mutual fund is Rs 500 Crore and it has issued 10 Crore shares, then the fund’s NAV per unit will be Rs 50. NAV changes based on how underlying share’s prices are changed in the market.
In simpler terms, NAV of a mutual fund is the per unit market value of a mutual fund.
When you invest in a mutual fund you get units in exchange for your total investment. In this way you hold certain units of the mutual fund scheme based on the amount you invested. It’s something like becoming a shareholder in the mutual fund scheme.
As the name suggests AUM means, the total assets under the management of the mutual fund.
Let us take a hypothetical example to understand the difference between NAV and AUM.
If 100 people each invested Rs 10,000 in a mutual fund scheme, then the fund has assets under management of Rs 10,00,000. If 100 people invest Rs 10,000 each in 20 different mutual fund schemes of the same fund house, the mutual fund’s assets under management is Rs 2,00,00,000.
When you buy Rs 1,00,000 worth of units at the preset per-share NAV in a mutual fund, it means that money is added to the total AUM of the fund. The mutual fund will use your money to buy more stocks or other financial securities. Your money will either shrink or grow depending on how the underlying financial securities performs.
Therefore, unlike Net asset value (NAV), AUM is in reference to the total value of assets being managed by rather than expressed on a per unit basis.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
