What is AUM, its calculation and importance

Why Asset under management Matters?

• Evaluation and measurement of AUM are essential for management in defining the powers and flaws of a firm. It can be a decision-making position.
• Investment companies also use assets under management as a means to attract investors.
• AUM may show to be essential for the investors in getting a hint of the size of a company’s services.
• It may also be a significant part to be viewed for new fund investors and wealth management services.
• Products with greater AUM have precise selling or buying measures which surely affect the liquidity of a product.

Importance of Asset under management before Investing

Mutual fund investors usually see at the fund’s AUM and favour a fund house whose AUM is on the greater side. It is a general view that if many investors have previously invested in the fund, then it must be a great one. But, there are many reasons why AUM must not be the only essential factor while picking a fund. There are several other parts such as:

• The expense ratio
•  Compliance with investment command 
•  The reputation and reliability of the fund manager

 Which also requires to be examined before spending in funds. Let’s learn the importance of AUM regarding various types of funds.

1. Equity fund: An asset manager must aim at the flexibility of the Equity funds rather than the quantity or popularity of the markets.
2. Debt fund: The fixed fund expenses in the debt mutual fund get scattered over a great number of investors which serves to decrease the expense ratio per person. Hence more AUM will engage more investors.
3. Small-cap funds: If a fund operates the bulk of the shares in a company, it may not be ready to buy or sell steadily while the market variation due to its huge size. Thus the investors with high-risk appetite must go for spending in small-cap funds to get huge returns.
4. Large-cap funds: Large-cap mutual funds schemes give constant returns as the risk is pretty low. The investors asking a continuous extension of capital and constant profits in the future should spend their money in large-cap funds.

Impact of Asset under management on Mutual Funds

• There are possibilities where a fund’s rising AUM can change its performance negatively. But there is virtually no proof which means that a higher AUM affects the fund performance negatively. It is the efficiency of the fund manager to examine market possibilities.
• In many cases, a higher AUM requires limitations on the manager in taking immediate investment proposals. Hence, before investing, you must consider the performance of the fund you invested in upon its competitors.
• Investors are called to view a valid and right of an asset manager’s actual performance across time. Because many asset management companies match the range of their AUM with competitors as a measure of performance of a fund house. Thus, proper exposure is very essential for carefully estimating an asset manager’s performance.
• In many cases, a longer asset-under-management has ended the manager in taking fast investment calls. Consider the performance of the fund you spent in upon the benchmark and its competitors before investing.

Impact of Asset under management on Effect Ratio or Fee

Every fund house imposes a fee, which is described as a Management Fee. This is to meet the admin charges and asset manager’s fee for his efforts. It is a flat rate determined on the whole fund amount. It is charged to investors based on the number of units they operate. The fund performance has no immediate influence on the fees. Total Expense Ratio (TER) is the yearly costs to run a mutual fund. Securities Exchange Board of India (SEBI) command the AUM to be constantly higher than Total Expense Ratio.
To sum things up, AUM is a great method to examine a fund’s reputation and performance before investing. But the risk is an essential factor. Thus, your investment choices must not change due to AUM.

 Calculation of Asset under management

There are various methods to calculate AUM and it differs for each company. It depends on various important factors. Fund houses employ various methods to determine assets under management. 

• If the performance of investment rises or if the investment company takes new assets and clients, it may improve.
• If the performance declines, it may decline.
• It may also reduce due to client turnovers, withdrawals, fund closures, or redemption.
• Assets under management hold investor capital. It may also involve capital that is owned by the managers of the investment firm.

Equally goes for the sudden closure of the fund or every time an investor redeems his/her share. Assets under management entail capital invested during the company’s products, this holds the shares of the company officials as well.

Conclusion