Assets Under Management (AUM) are the total market value of all financial assets held by an institution or person on behalf of clients. The most common example of AUM is a mutual fund which holds bank deposits, treasury bills, cash reserves, stocks and bonds etc. on behalf of its investors. Apart from mutual funds, the term AUM is also used in hedge funds, venture capital firms and wealth management firms.
Understanding Assets Under Management
Simply put, assets under management (AUM) refers to how much money an institution is managing for its clients. This can be explained with an example. Radha invested INR50,000 in a mutual fund. This amount would become a part of the AUM of that mutual fund. The mutual fund manager would be able to buy or sell stocks to meet the fund objectives using all of the AUM. He would not require any additional/special permissions.
Generally a higher AUM indicates better investment inflow and quality of a fund house. AUM depends on the inflow of money in and out of the fund. So it can fluctuate daily. Also performance of chosen investments, reinvesting of profits and capital appreciation increase the AUM of a fund. When new customers sign up for a mutual fund, the AUM increases. However, redemption of mutual fund units would decrease the AUM.
Importance of Assets Under Management
- A higher AUM in a mutual fund displays trust of the investors in the fund over and above the quality and better investment flow.
- The fees of the fund house are normally calculated as a percentage of the Assets Under Management (AUM).
To summarize, Assets Under Management is one of the parameters to look at while choosing a mutual fund house. Since you would be investing your hard earned money, it is better to go with the fund houses with higher AUM.
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