Discover What Asset Under Management Means (With Types)
Updated 30 September 2022
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Asset under management (AUM) is a measurement of financial health. Financial institutions, economic advisors and investment firms use it to calculate how much money they manage for their investors. Learning about AUM and how to use it can help you make more informed economic and investment decisions. In this article, we explore what asset under management means, discuss why is it important, share the types of AUM, show how to calculate AUM, provide the different reasons for using this concept and also give an example to become more comfortable and familiar with it.
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What Asset Under Management Means?
Asset under management means the total market value of investments that financial institutions hold and manage on behalf of their clientele. Market value is the quoted financial worth of an asset, such as the monetary value of a house. Firms like brokerages, depository institutions and venture capitalists use this financial measurement. Their primary goal is to increase AUM, a common indicator of success. Sometimes a financial institution's held funds may also be their own economic assets. AUM is useful for firms that want to monitor and keep updated data on their financial health.
The Securities and Exchange Board of India, also called SEBI, sets the guidelines and regulations that financial institutions and their fund managers are required to follow. It is important for potential investors to look beyond a firm's high AUM when seeking an investment firm. Factors like the fund manager's historical reputation and their compliance with SEBI policies are worth examining as part of the assessment process.
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Why Is The Concept Of Assets Under Management Important?
The concept of assets under management is important because investors seeking a potential investment firm can assess the validity of the firm's financial practices based on the AUM. The higher a firm's AUM is, the more likely people are to trust them and invest with them. A firm's viability increases significantly if its AUM has grown over time, which indicates it has more customers now or it has grown its financial portfolio.
Institutions use this metric to compare themselves to other firms. For instance, firms with a high AUM can claim that clients trust their expertise more than they trust that of competitors with lower AUM. One of the other primary reasons AUM is important is because it determines whether an investment firm has to register with the SEBI rather than simply registering with the state in which they operate.
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Types Of Assets Under Management
Assets under management generally fall into two categories which include:
Personal assets under management
This refers to the assets under management metric where clients incur a fee based on the total value of the assets they provide to an investment firm to manage for them. Typically, the fund managers receive a fee based on the returns or earnings from investments, which may vary depending on the company they work for and the funds they manage. This makes it essential to check the expense ratio of the fund, which denotes the fees of the AUM firm, before investing. Usually, this fee varies between one and three per cent.
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Regulatory assets under management
According to SEBI's guidelines, regulatory assets under management include all assets and securities a firm manages. This also includes continuously supervised assets. This may also include those assets that a fund manager requires explicit permission from the client to conduct transactions and trades.
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Calculating Assets Under Management
Calculating AUM accurately depends on the assets an institution holds, as they may not include all the assets in their calculations. Some firms consider all investment capital in their AUM calculations, while others may only include relevant capital by their executive investors. Regardless of the assets that fall under a particular institution's AUM, different methods help to calculate this metric. The most basic method involves analysing the investment profile of a fund. The investment typically rises as it provides positive and consistent returns. You can continue to calculate the AUM upswing as new investors place their money with the firm.
It is important to understand that money that the market transactions of a fund may cause daily fluctuations. Investors removing their money from a firm lowers that firm's overall AUM calculation while investing more money with a firm increases it. You can calculate AUM decreases and increases based on its market value. An AUM can lose value because of issues like poor investment performance, lower investor funding and fund closures. It can increase in value when there is favourable investment performance and introduces new funds for investors. Some investment instruments include:
Certificates of deposit
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Reasons For Using Assets Under Management
Professionals use assets under management for two reasons. The first is to better gauge a firm's integrity. The second is to assess AUM's relationship to the firm's funding types. Assets under management allow for accurate comparisons between a firm's performance history and the transparency of its investment manager because it provides information that helps evaluate an institution's disclosure policies. Investors can even use AUM to calculate the total fees they may be required to pay for a transaction. For the investment firms, assets under management help them in attracting new investors and grow their revenue.
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Assets Under Management In Relation To Different Funding Types
It may be helpful to understand how assets under management work in relation to different funding types, as this can aid in any assessments of investment firms. Here are three funding types and AUM's relation to them:
Assets under management matter here to encourage the consistency of returns and the fund house's compliance with investment mandates. It is very important for an equity fund to surpass set benchmarks during market highs and lows, so profit margins meet their quotas. To achieve this, equity funds rely on the expertise of a financial asset advisor or manager to create persistent returns that increase with time.
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Assets under management have a significant role in debt fund investments because a debt fund with higher capital margins can disperse the expenses and fixed fees over a wider range of investors. Spreading these unavoidable costs across all the investors reduces their individual expense ratios and increases the returns of their funds. Increasing the number of assets that exist under a fund like this also helps the firm to charge higher rates. The process ultimately benefits both investors and the AUM firm or manager.
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Small-cap funds introduce restrictions on cash influxes after certain intervals. Assets under management used for this fund type allow you to gauge the effects of those restrictions, which occur when mutual funds grow beyond a specific set margin. Considerable shareholders with funds that have become very large do not trade easily during market fluctuations. To ease this challenge, small-cap funds rarely engage with significant investments or lump sums.
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Example Of Assets Under Management
Below is a simple example of assets under management in finance:
Pahwa Finance is an AUM firm with a diverse portfolio. They have cash, bonds and stocks. Though market fluctuations are constant, their present assets are ₹20 crores in cash, ₹30 crores in stocks and ₹50 crores in other debt instruments. The sum or total market value of all their investments is ₹100 crores. This means that the firm's AUM is ₹100 crores.
Please note that none of the companies, institutions and organisations mentioned in this article are affiliated with Indeed.
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