Assets Under Management (AUM) – Meaning, Impacts & How to Calculate

What is AUM?

Assets Under Management (AUM) refers to the total value of the assets that a financial institution or fund manager manages on behalf of their clients. Assets under management (AUM) is also a measure that tells the size of a mutual fund portfolio. AUM is the total market value of all the categories of assets like stocks, bonds, commodities, other securities, etc. that an asset management company manages on behalf of its investors. AMC acquires funds as per the investing strategy opted by the fund managers with the main objective of maximising investors’ returns. AUM is also a factor that represents the ability of an asset management company to attract and retain investors.

Key takeaways from Asset Under Management:

• AUM represents the total assets holdings by the AMC or fund manager on behalf of its investors. AUM is a quantum to represent the market value of assets that are held by the AMC.
• AUM is seen as a key point of consideration by investors as it represents the management’s performance.
• Investors use the AUM in selecting the mutual funds they should invest in. A high AUM is considered a positive mark to invest in any mutual fund.

Impact of High AUM on Mutual Funds

1. Considered Trustworthy: Mutual fund schemes with larger AUMs are considered more trustworthy by the investors as they have higher investor participation. It is generally presumed that scheme with a higher AUM will deliver better returns as a fund’s higher AUM will cover all the funds expenses easily and can result in generating better returns than a fund with a small AUM.

2. Influences Debt Funds: It is to consider, that AUM in debt fund is more important as compared to equity funds as debt fund with more assets can spread the expense in a better manner and helps in increasing returns. However, in practical aspect higher AUM does not assure any assured returns, in some cases funds with small AUM can generate better returns for its investors rather than funds with higher AUM.

3. Key Deciding Factor: AUM is seen as a deciding factor by many investors but it should not be seen as the only factor while deciding the mutual fund in which you want to invest in. AUM can not be the only factor to evaluate any mutual fund’s performance. Investors might consider investing in mutual funds with high AUM as it provides a sense of trust to investors about the performance of both AMC and mutual fund, but it is not important that a fund with higher AUM will surely result in assured returns.

4. Consideration of Other Factors: It is important to give due consideration to the fact that any fund’s performance is based on how it is managed and synergised by the fund managers with the investment objectives of investors, skills and efforts made by the management is crucial in determining fund’s success. Investors should also consider the returns generated by the fund over time compared to its benchmark, the risk associated with the fund, the history, and the expertise possessed by the fund manager.

Relationship Between AUM and Expense Ratio

1. Asset management companies charges fees for the management of funds, this fees is calculated as a percentage based on the assets under management by the AMC. This fee allows AMC’s to cover the charges which they incur in order to manage funds. The fees are deducted from the returns and combined are called as Total expense ratio.

2. Example of such expense are Government charges, Fund manager salary, Fees to credit agencies, brokerage, etc. Higher the AUM, higher will be the managing cost for these funds and more efforts will be required by the AMC to properly manage these funds and generate the best returns out of it.

3. It can also be propounded that cost is directly proportional to the asset holdings. In order to manage funds AMC’s are required to charge expense ratio as a percentage of AUM. An expense ratio is calculated by dividing the fund’s total operating expenses by the average value of its assets under management (AUM).

4. In order for the safeguard of investors interest, SEBI (Securities and Exchange Board of India) has directed guidelines in terms of expense ratio that can be charged from the investors. SEBI has considered AUM as a deciding factor to determine the exchange ratio.

The limit for expense ratio is as follows:

Assets Under Management by the AMC (In crore ₹)	Total Expense Ratio for Equity Funds (in %)	Total Expense Ratio for Debt Funds ( in %)
0-500	2.25	2
500-750	2	1.75
750-2,000	1.75	1.5
2,000-5,000	1.60	1.35
5,000-10,000	1.50	1.25
10,000-50,000	1.5 + 0.05 (for every increase of ₹5,000 crores of daily net assets)	1.25 + 0.05 (for every increase of ₹5,000 crores of daily net assets)
50,000+	1.05	0.008

How to Calculate AUM?

1. AUM (Asset under management) is fluctuating, and its value changes as per the performance of invested assets in different market conditions.

2. In order to calculate AUM, three major factors are the key: the market price, inflows and outflows.

3. AMC collects investors money to invest and inflows and outflows both happens in any fund and AUM keeps changing as per the investor’s trend of calling in or calling out of funds.

4. Investors usually use net proceed to determine the AUM, net proceed if shows positive figures signifies that AUM of fund is increasing, whereas negative figure of AUM signifies that AUM is decreasing.

5. Different composition is adopted by different fund houses in deriving the AUM. Some AMC may prefer to incorporate mutual funds in addition to deposits and cash in hand, while other AMC’s only consider the funds that can be utilised for trading purpose on the clients’ behalf.

Does AUM affect NAV?

AUM (Assets Under Management) can affect NAV (Net Asset Value) to certain degree. In order to derive NAV of any fund, AUM comes in the picture as NAV is nothing but the average value of holding made by any AMC. NAV is calculated by dividing the total value of all assets of mutual fund along with all other investments holdings by the number of shares outstanding. The key highlight is that NAV is directly proportional to AUM, in case if the AUM of a portfolio increases, it can potentially increase the NAV as well if the value of asset holding by fund increases. Similarly, if the AUM decreases there are chances that it will also decrease the NAV if the value of the assets holding by the fund decreases. NAV is calculated everyday.