Assets Under Management (AUM) is a commonly used term in the world of finance and investment. It refers to the total market value of the assets that a financial institution, such as a bank or an investment company, manages on behalf of its clients. Assets can include stocks, bonds, real estate, mutual funds, and other investment vehicles. In this article, we will discuss the importance of AUM and how it impacts the financial industry.
What is Assets Under Management (AUM)?
Assets Under Management (AUM) is a metric representing the total value of assets a financial institution manages on behalf of its clients. It is an essential metric used by investors, financial advisors, and asset managers to gauge the size and performance of a company. AUM can include various types of assets, such as stocks, bonds, mutual funds, real estate, and more.
The AUM metric is usually calculated at the end of each business day. It helps determine the investment firm's fees for managing the assets. AUM is also an essential factor in determining the size of a firm and its ability to generate revenue.
Where can you get AUM data?
The fund houses generally disclose AUM data for mutual funds every month, along with portfolio disclosures. The Association of Mutual Funds in India (AMFI) also provides monthly AUM data for the industry and key categories of mutual fund schemes.
AUM and fees
Mutual funds charge fees in the form of an expense ratio, which is a percentage of a scheme’s AUM. The Securities and Exchange Board of India (SEBI), the capital markets regulator, has set guidelines for expense ratios.
For example, an equity fund can charge up to 2.25% towards the total expense ratio on the first Rs 500 crore of AUM. The maximum expense ratio that a debt fund can charge for the same AUM is 2%. As the AUM increases, the fund can charge a lower expense ratio. SEBI also allows an additional expense ratio to be charged, subject to certain conditions.
Importance of AUM
AUM is an important metric to evaluate the success of a financial institution. Here are some of the reasons why AUM is so important:
- Revenue Generation: The primary source of revenue for most financial institutions is the fees they charge for managing their client's assets. The higher the AUM, the more revenue a firm can generate. As a result, financial institutions with larger AUMs are more profitable and have more resources to invest in research and development.
- Business Expansion: AUM is a crucial factor in determining the size and scale of a financial institution. A firm with a large AUM is considered more established and reputable than a smaller firm. This reputation can help the firm attract new clients, expand its services, and grow its business.
- Performance Evaluation: AUM is also an important metric used to evaluate the performance of a financial institution. The higher the AUM, the more successful the firm is considered to be. It also indicates the firm's ability to effectively manage its clients' assets.
- Industry Benchmarking: AUM is a commonly used metric in the financial industry, allowing firms to benchmark themselves against their competitors. This benchmarking can provide valuable insights into industry trends, best practices, and growth opportunities.
Factors influencing AUM growth
Several factors influence the growth of Assets Under Management. Let's discuss some of them below:
- Market performance: Market performance is a significant determinant of the AUM growth rate. The value of a fund's assets is directly proportional to the market performance. A bull market, for example, can increase the value of the securities in a mutual fund or ETF, which increases the AUM. Similarly, a bear market can reduce the value of the securities, causing a decline in the AUM.
- Investment inflows: Investment inflows refer to the funds that investors deposit into a fund or account. Several factors can influence investment inflows, including market trends, investor sentiment, and economic conditions. Higher inflows can lead to an increase in the AUM, while lower inflows can lead to a decrease.
- Investment performance: The performance of a fund is a crucial factor affecting AUM growth. A fund with a strong track record of investment performance is likely to attract more investors, thereby increasing the AUM. Conversely, poor investment performance can lead to redemptions and a decrease in AUM.
- Fees: Fees are another essential factor affecting AUM growth. A fund's fees can have a significant impact on its AUM, as investors may choose to invest in funds with lower fees. Fund managers may reduce fees to attract more investors, leading to an increase in AUM.
Strategies to improve AUM growth
To increase AUM growth, fund managers can apply several strategies. Let's discuss some of them:
- Portfolio diversification: Fund managers can increase AUM by diversifying their portfolios. Diversification can reduce risk and attract a wider range of investors who are looking for a balanced investment portfolio.
- Marketing and advertising: Fund managers can increase AUM by advertising and marketing their funds effectively. They can use various mediums such as social media, television, and print advertising, to reach potential investors and increase their AUM.
- Performance-based incentives: Fund managers can offer performance-based incentives to their employees to encourage better investment performance. This strategy can help increase the AUM by attracting more investors to the fund.
- Lower fees: Fees can have a significant impact on AUM growth. Fund managers can lower their fees to attract more investors, leading to an increase in AUM.
In conclusion, Assets Under Management (AUM) is a critical metric for fund managers and investors. It indicates a fund's success and helps to measure its performance. Several factors influence AUM growth, including market performance, investment inflows, and fees. Fund managers can implement various strategies to improve AUM growth, such as portfolio diversification, marketing and advertising, performance-based incentives, and lower fees. A successful strategy can increase AUM, resulting in higher revenues and better returns for investors.