There are different types of investment avenues that pool the investments of different investors and then invest the pooled money into various securities. Hedge funds, insurance companies, mutual funds and Exchange Traded Funds (ETFs) are some of the popular investment avenues where a fund manager pools money from all investors in the product and makes investments in carefully picked out assets for maximizing returns.
Assets under Management
Assets under management (AUM), also called funds under management. It refers to the total market value of the investments or assets managed by a mutual fund, hedge fund, wealth management firm, portfolio manager, or other financial services firm. In other words, it is the total amount of other people’s money that a person or entity controls. In some cases, assets under management include the total amount of assets that an entity manages for all clients. Otherwise, AUM refers to the total market value of assets managed for specific clients.
Calculation of AUM
The most common method to calculate the AUM is by using the following values:
The market value of the underlying assets on a particular date
The returns generated by selling off a part of the assets
The redemptions from the portfolio
Investments into the portfolio
Dividend paid out
Factors influencing the AUM
The factors that cause a change in the AUM are as follows:
Inflows and outflows- Investments in and redemptions from the fund affect the AUM. Investments or inflows increase the AUM, and redemptions or outflows decrease it.
The market value of underlying assets- The AUM changes with a change in the market value of the fund’s underlying assets. If the markets are performing well, the market value of the assets may rise and then, so does the AUM. The opposite is true when the market is in a downtrend.
How Important Is AUM For Investing?
A mutual fund with a hefty AUM indicates a large client base, meaning that the trust factor of the fund is high. AUM can be used as a measure of liquidity. A higher AUM can provide a cushion in case there is a big redemption. This is especially true for overnight and Liquid Fund that are sensitive to large redemptions by institutional investors. Having a higher AUM for such funds means a better ability to absorb shock offloading.
One factor to keep in mind is that size is relative. Small or large depends on what you are comparing it against. Rather than looking at the absolute value of assets that a mutual fund is managing, compare the figure with its other peers to ascertain how the fund is doing.
Additionally, a large AUM does not automatically guarantee better performance. Although it is worth taking into account, a fund’s AUM should not be the only factor that affects your investment decision. Just because other people in the market have trusted a fund house with their money does not mean that you should too. Consider AUM in conjunction with other indicators like a fund’s historical performance vis-à-vis peers in different market cycles, expense ratio, risk ratios, fund house’s pedigree, the reputation of the fund manager, risk-management strategies, compliance, among others.