It includes the ROI generated by the mutual funds and the available capital for fresh investments. Therefore, AUM indicates a mutual fund’s size as well as performance. An increasing AUM shows positive performance, or it may also mean that new buyers have bought more funds. On the other hand, a decreasing AUM indicates poor performance, or it could also mean higher unit redemption by the customers.
Investment advisers use AUM to compare the performance of a mutual over different points in time. They also compare them against various mutual fund houses to assess their comparative performance and generate AUM reporting to help them make data-based decisions. Let us find out how investment advisers calculate Assets Under Management.
Importance of Calculating AUM While Investing
A mutual fund with a high AUM reflects a high trust level and a more extensive client base. Many investment advisers calculate AUM to understand the liquidity level of a fund. A high AUM works like a cushion against a huge redemption. It primarily applies to liquid and overnight funds that receive large redemptions from institutional investors. Funds with higher AUM can efficiently absorb shock or large-scale offloading.
Below is the significance of calculating AUM with respect to different investment options:
- Small-Cap Funds: Since these funds often avoid lumpsum investments, AUM does not affect them much. This is because the fund does not become a primary holder in the firm.
- Large-Cap Funds: Investors prefer investing in funds with higher AUM. It may not always mean high returns since they depend more on yields than AUM.
- Equity Funds: Equity funds do not depend on AUM as their performance depends on the fund manager. The returns may go higher or lower depending on the fund manager’s decisions.
- Debt Funds: An investment adviser cannot ignore AUM while investing in debt funds. A debt fund with higher AUM can spread the expenses across numerous investors, leading to a reduced expense ratio and increased ROI.
Generally, AUM includes funds that an asset manager can use to carry out transactions. For instance, when an investor invests in a mutual fund, it becomes a part of their overall AUM. Therefore, the asset manager can sell or buy shares and stocks using the invested sum without special permission.
Calculating Assets Under Management
Calculating Assets Under Management (AUM) is a complicated process since the calculation method may vary from one investment adviser to the other. For instance, some advisers include bank deposits and cash while calculating AUM, while others limit AUM reporting to unrestricted investment funds. Besides that, since AUM changes with a fund’s cash flow, it may fluctuate each day.
Several factors may cause a mutual fund’s AUM to increase or decrease, including the following:
- Performance of the assets
- Number of dividends a company pays out in the portfolio
- Acquisition of new assets and customers
- Loss in investment performance
- Reduced investor flow
- Fund closures
The total value of a mutual fund’s AUM never remains the same. It keeps fluctuating according to the money invested and the number of new customers buying the asset. The AUM also depends on the mutual fund’s generated returns.
Fund houses use different methods to calculate AUM. When the returns are positive, the total investment amount in the funds raised, leading to more investors and increased AUM. However, when the returns are negative, the AUM of a company decreases. Similarly, if the investors decide to redeem their shares, the AUM of a fund decreases, resulting in a lower AUM.
Investment advisers may calculate AUM in different ways, depending on the client’s discretion. They may calculate it based on a firm’s total capital or an individual client’s funds. Sometimes, they may not consider their overall cash, fixed deposits, and mutual funds. Instead, they calculate only the adviser’s capital on the client’s behalf. Since AUM changes every day, it depicts variable returns from mutual funds and stocks. For instance, when an investor invests in a property, they must monitor its price changes to manage the funds better and exit during negative returns. While assessing the investment options, investment advisers must look at how well mutual funds can manage their assets. AUM reflects the popularity of a mutual fund. However, it should not be the only deciding factor in making an investment decision. Other factors include the mutual fund strategies, fund manager’s experience, and results of AUM reporting as offered by experts.
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