Assets Under Management

AUM is an abbreviation for "Assets Under Management."

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It refers to the overall market value of assets managed by an investment advisor or financial institution, whether from a single client or a group of clients.

Specific definition for AUM varies by organisation; some include bank deposits, mutual funds, and cash in their computation, while others only consider discretionary money that investors have given an advisor to trade on their behalf.

The AUM of a fund can be compared over time to determine its legitimacy and success. You can also compare the AUMs of other mutual fund investment firms as an investor to better understand their performance.

AUM fluctuates when the value of the assets handled varies in response to market performance.

Why AUM is important?

Asset under management can define a company's size and success. Thus, it is critical that investors analyse them before making any investment decisions.  AUM covers the returns that a mutual fund earns and can thus be easily compared to its counterparts. If a fund's AUM is higher, it generally indicates that the fund is doing well, and the investor may want to consider investing in it.

However, the value of AUM cannot be the sole criteria to consider when deciding whether or not to invest in a fund. Some further aspects to consider include expense ratio, fund managers, prior year's returns, and so on.

Importance of AUM at the time of investing?

A mutual fund with a large AUM suggests a broad client base, implying that the fund has a good trust factor. AUM can be used to calculate liquidity. A larger AUM can act as a buffer in the event of a large redemption. This is especially true for overnight and liquid funds, which are vulnerable to big institutional redemptions. A bigger AUM for such funds indicates a greater ability to absorb shock dumping.

One thing to remember is that size is relative. It all depends upon what you compare whether it's small or large. Rather than looking at the absolute value of assets managed by a mutual fund, compare the amount to that of its peers to see how the fund is performing.

Furthermore, having a large AUM does not automatically imply superior performance. Although it is important to consider AUM for a fund, it should not be the only element influencing your investing decision. Just because others in the market have invested their money in a fund house does not imply you should. Consider AUM in conjunction with other factors such as a fund's historical performance relative to peers across market cycles, expense ratio, risk ratios, fund house pedigree, fund manager repute, risk-management tactics, and compliance, among others.

Calculations used for AUM

The value of the assets managed by a fund is never fixed. It varies according to the number of investors that put money into the fund and the profits it delivers.

Positive returns boost the overall investment and can attract additional investments, increasing the AUM. Negative returns, on the other hand, will have the opposite effect. Redemption of units also have an effect on the AUM.

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