Investing your money at the right time and in the right place is the key to combating fast-growing inflation. But when investing our hard-earned money, it is important to know where the money is going, who is managing it, and how. There are many schemes and ways to invest your money. While doing so, we often come across a lot of heavy financial jargon, and one of them is AUM. You must often hear this about mutual funds. So what is AUM in finance, and why is it so important?
Read on for some interesting financial facts about AUM.
What does AUM mean?
AUM means Assets Under Management, which is the total market value of investments held by an investment manager/organization on behalf of their investor, with their consent. These assets can be anything, including stocks, bonds, mutual funds, ETFs, and other investment options.
Global assets under management (AUM) are expected to reach $200 trillion by 2030, growing at a CAGR of 6.2%. See detailed market reports here.
How to calculate AUM?
It is calculated by adding the total market value of all the investments carried.
AUM = ⅀ (Current Market Value of All Assets)
The formula, used to calculate the daily amount of AUM:
AUMtoday = AUMyesterday + Net Income + Market Profit/Loss
Here, net income is your new investment without redemptions, and market gains and losses are changes in asset value due to price movements.
How is your money turned into assets?
When you invest your money, it is converted into an asset that is more valuable than your paper money. These are the things that are bought with that money. And the value of these things keeps increasing faster than real money. It can be anything, like digital gold, ETFs, mutual funds, stocks, shares, and property.
Types of AUM assets
As discussed above, your money can be converted into different types of assets by using it to buy different things. Let me tell you about some of them.
- Shares or Shares: These are stocks, or say you’re buying a certain percentage of a publicly traded company, including large-caps, mid-caps, and small-caps.
- Debt Funds: These assets are important components of mutual funds and emphasize fixed income securities such as government bonds, corporate bonds, treasury bills, and marketable securities. They tend to have low risks and a predictable outcome.
- Consolidated Funds: This is when investment managers divide your money into assets like equities, bonds, and sometimes even instruments like gold. It offers investors a broad portfolio and a great option for people who prefer growth with less volatility.
- Thematic & Sectoral Investment: These are mutual funds specified by target industries or well-rounded investment themes. These have high growth potential but also come with high risk due to cumulative exposure. Risks are often caused by economic downturns or industry-specific downturns.
- IFs and ETFs: Index funds or exchange-traded funds are passive investments that track the performance of a specific market index. People love their simplicity and cost effectiveness. In particular, traders and institutional investors prefer this investment.
- Other Investments: These investment methods are different from the traditional ones. Here you can invest in land, wealth, property, and gold. This can be used to diversify a portfolio, providing good returns over time, but comes with significant risk.
Each of these investment types has very in-depth sub-sections.
Factors Affecting AUM
The amount of AUM tends to fluctuate; sometimes you gain, and sometimes you lose. There are different factors that cause this, and some of them are listed below.
1. Market graphs
The market often has ups and downs, and your underlying assets go up and down in value, respectively. Highly volatile assets such as stocks, commodities, crypto currencies etc can be affected regularly.
2. Duties of investors
Here, AUM is affected by the investor’s action. When there is income (new investment by investment) such as buying new units, increasing capital, etc., the amount of AUM increases. On the other hand, if there is an exit or redemption by investors withdrawing their money it directly reduces the AUM.
3. Distribution
When the fund pays dividends or interest, the AUM decreases, and when these payments are offset or reinvested, the value increases. When better performing funds pass, the ratings tend to attract people to invest more, and this leads to an increase in AUM.
There are also other aspects, such as sales and marketing. Different fund types, such as open-ended funds and diversified fund structures, also have an impact on AUM.
How Do AUM Managers Earn?
You must ask yourself that if someone uses brains and resources to invest your money, then what do you gain? So here’s how wealth management companies make money.
These companies usually sell investment solutions as products to their clients. They sell mutual funds, ETFs, and manage private accounts for other companies. In return, they charge a fee or a percentage of the assets under management.
Fees take into account certain factors such as the type of investment, asset class, investment sector, and the complexity of the transaction. For example, if the investment strategy involves an advanced process and tools such as trading or taking short positions, then clients may be charged higher fees.
Ongoing charge (OCF) charges, performance fees, start-up and exit charges, etc., are other charges incurred by companies that these agents charge to customers.
Types of Asset Management Companies
Different types of investments are managed by different specialized companies with the same objective.
1. Mutual Fund Companies
These companies use the investor’s money to buy stocks, bonds, and other securities that are consistent with the fund’s purpose. These companies are preferred by retail investors. Clients receive fund units, and returns as per market performance.
2. Hedge Fund Companies
This is preferred by high net worth individuals and institutional investors, where they use programs such as leverage, short selling, and derivatives. The objective is to get maximum profit in all kinds of market fluctuations. This involves significant risk but has few regulatory limitations.
3. Private Equity Companies
These are companies that invest directly in unlisted/private companies, or pool money from institutional investors and high net worth clients to acquire, restructure, and develop private companies. Their goal is to increase the value of their company for a long time before selling it for a profit.
4. Real Estate Investment Trusts (REITs)
Firms invest in real estate assets, such as commercial real estate. Investors receive benefits from real estate without owning the property. These companies own a portfolio of high value real estate. Leasing, selling, and collecting rental income, and later distributing it among the shareholders as their profits and dividends.
AUM is competitive with NAV
| A feature | AUM | NAV |
|---|---|---|
| Explanation | See as assets under management, it is the total market value of all the assets held by the company. | It represents the net asset value, which is the total value of the fund equal to the value of the investor. |
| Counting | All assets of all currencies (securities and cash) | Total assets minus total liabilities for all remaining units. |
| It usually refers to | Total asset manager (total AUM of all funds) minus investor redemptions | Individual fund (on a per share or per fund basis) |
| It shows | It says a lot about the size of the property manager, their position and trust among customers, operational benefits, and experience | It refers to the share price (intrinsic value), and the remainder is the liquidation value |
| Change Frequency | It fluctuates throughout the day | Calculated at the end of the day |
Benefits of Assets Under Management
- It shows that you are trustworthy and fair, a high AUM shows that the fund or company is trustworthy. It shows credibility, market position, and investor confidence.
- A large AUM indicates that fund managers can help you diversify your investments.
- If a company has a large AUM, it can distribute fixed costs to clients, resulting in lower cost levels for investors.
- Fund houses with larger AUMs have better bargaining power and wider investment opportunities.
- A better AUM indicates the stability of the fund management company.
The conclusion
I hope this blog has helped you understand what AUM is in finance. If you are investing, you must know how and where the investment is made. Learning and understanding about assets under management is the first step to doing that. We have discussed its various aspects, such as types, risks involved, benefits, and how to calculate AUM. I also mentioned the clear difference between NAV and AUM, which often confuses investors. Keep reading, keep reading. And let me know in the comments, how you choose to invest your money?
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