Asset under management meaning
Asset under management means the market value of total investment managed by fund/entity/organization. This value keeps changing with the change in market performance. If the value of market investment increases, it leads to an increase in assets under management.
Detailed understanding
Suppose you invest in a mutual fund. In the same fund scheme, there will be other investors just like you. Assets Under Management is the value we get at after all of the investments made by investors are totaled up, both individual and institutional. What exactly does “asset under management” mean? Why is it crucial for investors to comprehend AUM? Let’s discuss detailed aspects of the same.
Assets under management (AUM) gauges the total amount of investments administered by a banking institution, investment firm, trust fund, or hedge fund. Funds under management is another name for an asset under management.
Various companies and organizations manage investments on their client’s behalf. Trust funds, banking institutions, venture capital firms, and non-depository financial institutions are some examples of these businesses. Because assets under control frequently vary, banks and other financial institutions disclose this information every three months.
Asset management companies and financial organizations hold institutional investors’ funds through various investment vehicles, including exchange-traded funds, mutual funds, hedge funds and others.
A portfolio manager frequently manages every investment vehicle. AUM uses a fund’s entire holdings of assets to determine the size of the fund. The amount of AUM is based on how quickly investors add their money to a fund; If there is a rise in the investors’ number in a fund, the AUM will rise, and vice versa.
In the investing sector, asset under management is a critical indicator. Aside from measuring total assets or funds handled by an investment business on their client’s behalf, it also provides information about the market environment and investment performance.
For instance, a rise in AUM suggests that investment performance is improving, encouraging many investors to buy more stock. A loss in investment performance also signals a drop in AUM. AUM typically provides insight into a company’s strengths or flaws and aids investors in choosing which company to invest in.
Asset under Management Example
Suppose you invest $35,000 in a mutual fund. The fund manager can then acquire or sell shares in line with the investment goal. The invested amount becomes part of the AUM.
Asset under Management Formula
AUM is calculated differently for each organization. Deposits, mutual funds, and cash may all be included in some banks, but only money subject to discretionary management may be included in other organizations. In addition to the cash a manager has available to make new investments, it may also include the returns on investment a mutual fund has generated.
The various kinds of business models are one factor that contributes to the possibility of diverse AUM calculations. AUM is calculated differently by mutual funds than by financial advisors. In addition, the SEC stipulates what can be and cannot be included in the computation if the organization is big enough to fall under SEC jurisdiction. Smaller businesses are subject to state regulation and may use different definitions of AUM and what should be included and excluded.
AUM can also be determined for the entire mutual fund and a particular client.
An easy illustration of a mutual fund owning equities, corporate and government bonds, and cash is the following:
$5 million of stocks+ $3 million of bond certificates+ $3 million of savings bonds/government bonds+ $4 million of cash= $15 million of AUM.
AUM, which is not defined on a per-share basis, is the term used to describe the entire market value of assets managed by a person or a company (not a fund).
Investors in mutual funds frequently check at the fund’s AUM and become encouraged if it’s higher than usual. People believe the fund must be a good one since so many investors have already contributed to it. But there are lots of reasons why this figure shouldn’t matter much when picking a fund. Among the most crucial elements to take into account are the expense ratio, the fund manager’s track record and the adherence to the investing mandate.
A large AUM indicates a diverse clientele, which suggests a high trust in the mutual fund. Liquidity can be calculated using AUM. A larger AUM can provide a safety net when a sizable redemption occurs.
Moreover, a high AUM does not necessarily translate into higher performance. The AUM of a fund shouldn’t be the only factor in your investment decision, although being a crucial one to take into account. You shouldn’t trust a fund house just because other market participants have done so. AUM should be taken into account along with other elements like a fund’s past performance against its rivals over time, relative risks, techniques for risk management etc.
Market turbulence has a direct impact on mutual funds’ AUM. This is because changes in pricing will have an impact on the fund’s asset’s value.
Since it’s a sign of how well a company is doing, AUM is closely watched and evaluated. Given that it is frequently contrasted with its rivals based on size, it is also a marketing strategy to attract new investors. AUM is frequently used as the basis for calculating management fees. Furthermore, portfolio managers and funds are frequently ranked according to their AUM.
Conclusion
Asset under management refers to total assets/total investments managed by an entity/organization. If investment performs well, the value of assets under management increases. On the other hand, if the investment does not perform well, the value of the assets under management decreases.
It’s one of the widely used measures when investors select organizations to manage their investment.
