What is Asset Under Management (AUM)?

Asset Management Company (AMC) is an institution registered under SEBI (Securities and Exchange Board of India). It pools money from multiple investors and invests it in assets, such as equities, bonds, and real estate to generate returns.

1. Assets Under Management (AUM): Represents the total value of investor funds managed by an AMC. Higher AUM reflects investor trust and enables economies of scale.

1. Core Role: AMCs make investment decisions on behalf of investors and manage portfolios to help grow wealth.

1. Fund Managers: AMCs appoint professionally qualified experts to manage investments using defined strategies and risk management tools.

1. Research Support: Research analysts provide insights and analysis to aid informed investment decisions to support fund managers.

Importance of AUM in Mutual Funds

Some of the reasons why AUM is important are given below:

1. Measuring fund size: AUM indicates the size and scale regarding the number of rags in a fund. A large AUM hints that the fund is present in a big way in the market, and there are chances that it will be able to attract ample investors.

1. AUM influences fund performance: It is by means of AUM that a fund will perform. In some stats, heavy AUM fund managers may find it tough to generate high returns-that may be because of difficulties in spotting profitable investments without unduly moving the market. Smaller funds can find many more avenues for investment than big funds, and with it come a higher potential for reward.

1. Fees are affected: Fees AUM for mutual fund indirectly influences fees charged to investors. Larger funds may require higher minimum investments, again limiting them from being made available to a wider base of investors.

The AUM is thus a critical measure of the scale of a mutual fund, its potential for performance, and the fees. It does give us good insight into its overall quality and efficiency of management.

Calculation of Asset Under Management (AUM)

The calculation of Asset under Management (AUM) is done consistent currency conversions. Now, calculate AUM in Rupees by following these steps:

 Calculate AUM in Rupees

1. Assets Identification

List all the assets managed by the firm or advisor. These could be:

1.  Stocks

1. Bonds

1. Properties

1. Mutual Funds

1. Cash and Substitutes

2. For the Market Value:

Use rupee prices for all assets listed in the Indian market from the BSE or NSE, etc. such that India-traded assets need to be converted in Rs. 

For foreign assets, use the prevailing exchange rate to convert the value into Rs.

3. Adjustments of In and Outflows:

Add contributions from new clients (inflows) and subtract withdrawals (outflows) the AUM will reflect the current position of assets under management.

4. Totaling:

 Calculate the total amount of money in rupees managed as AUM by adding together the Rupee-denominated values of all individual assets.

 Example:

An entity manages the following assets:

1. Indian Stocks: Rs.500 crores

1. Bonds: Rs.300 crores

1. Real estate: Rs.200 crores

1. Cash equivalences: Rs.50 crores

Fresh client activity is as follows:

1. In flow: Rs.100 crores

1. Out-flow Rs.20 crores

 Calculation of AUM

 AUM = (Rs.500 crores + Rs.300 crores + Rs.200 crores + Rs.50 crores) + Rs.100 crores – Rs.20 crores

AUM = Rs.1050 crores + Rs.100 crores – Rs.20 crores.

= Rs.1130 crores.

How an Asset Management Company Manages the Funds?

The details about how the AMC manages the funds are mentioned below

1. Once you invest with an AMC, your money is managed as a portfolio aligned with your financial goals.

1. To identify suitable securities with strong return potential, fund managers research and analyse the market trends, economic factors, and policy developments.

1. Funds are allocated across asset classes such as equity and debt based on the scheme’s objective and investor risk profile, while strictly following SEBI guidelines.

1. To balance risk and returns and perform across varying market conditions, a diversified portfolio is created.

1. Performance monitoring is done at regular intervals using metrics, such as NAV and returns to ensure accountability and investor satisfaction.

Impact of High AUM on Mutual Funds

A mutual fund's AUM goes a long way in deciding how it interacts with the market, probably depending on the strategies of the fund houses. Asset-rich funds are most likely to receive greater interest from investors and considered strong.

For instance, a 2012 study of 361 equity funds revealed that 170 fell below Rs.100 crore, with 68% below Rs.50 crore. However, the total investment in equity funds shot up from Rs.530 crore in 2008 to Rs.3,841 crore in 2012, highlighting just how growth in AUM affords room to move in all kinds of funds.

AUM is a big factor in enabling asset managers to catch market opportunities, either providing for entrance or exit on investments. Furthermore, AUM gives investors a basis for evaluating moves the fund manager may make.

Importance of Retaining AUM Across Investment Options

1. Equity Funds: Equity funds aim to outperform the benchmark index over market cycles. Returns depend less upon AUM and more upon the expertise of the portfolio manager in regard to enhanced savings.

1. Debt Funds: For debt funds, AUM is considered the prime factor. Thanks to larger funds which can spread fixed expenses over a greater number of investors, individual costs are lowered, meaning ends can be met time and again.

1. Small-Cap Funds: AUM has less thrust or impact on small-cap funds unless the size of the fund grows to a large size. When AUM reaches a distressed environment, then it can create complications for fund houses, such as becoming large shareholders in specific companies. These funds tend to stick to SIPs rather than heavy investments.

1. Large-Cap Funds: The returns from the large-cap funds usually depend on the market, and AUM is inconsequential in its effectiveness on the performance of funds. Although smaller AUM classes can lead larger AUM types, as companies with smaller AUM might yield high revenue per dollar relative to the resources.

Crucial Takeaways on Elevated AUM and Fund Outcomes Some of the crucial takeaways on elevated AUM and Fund outcomes are given below:

1. A high AUM does not necessarily translate to higher returns for mutual funds.

1. The fund manager’s skill in making informed predictions and strategic investment decisions plays a critical role.

1. Mutual funds with lower AUMs and lower Net Asset Values (NAV) can provide opportunities for significant capital gains, making them attractive to certain investors. 

1. In conclusion, while AUM is a vital indicator of fund stability and scale, the portfolio manager’s competence and investment strategy ultimately determine mutual fund performance.

AUM and Expense Ratio

The expense ratio represents the total fees that mutual funds charge against their returns to cover costs for operation, administration, and management. Such overheads are collective to any mutual fund and define the smooth functioning of it.

The expense ratio of a mutual fund is also directly affected by the size of its AUM. Larger AUMs usually require more time, effort, and resources to be managed well which leads to higher associated costs.

So, in other words, there exists a direct relation between AUM and expense ratio: as AUM becomes larger, mutual funds incur various higher costs. But SEBI puts that it should always remain lower than AUM, with valid reasons.

Difference Between AUM and NAV

The differences between AUM and Net Asset Value (NAV) are given below:

Governing Bodies for an AMC

The governing bodies for an Asset Management Company are given below:

1. Trustee oversees the AMCs in India to safeguard investor interests.

1. SEBI regulates and monitors the functioning of all mutual fund companies.

1. The Association of Mutual Funds in India (AMFI) promotes transparency and ethical practices, and all fund houses must comply with its regulations.

1. RBI supervises the banks acting as sponsors, in addition to SEBI and AMFI oversight.

1. SEBI, AMFI, and RBI together ensure a well-governed and transparent mutual fund ecosystem.

Guidelines for an AMC by Governing Bodies

The guidelines for an AMC by governing bodies are listed below:

1. An AMC cannot act as a trustee for any mutual fund.

1. Minimum net worth of Rs.10 crore must be maintained by the AMCs.

1. The AMC Chairman cannot serve as a trustee of any mutual fund.

1. Unless fully disclosed in offer documents, AMCs are not allowed to invest in their own schemes.

1. Key personnel must have a clean and credible professional track record.

In conclusion, NAV represents the price per unit for purchasing or disposing of fund shares, whereas AUM measures the overall market worth and size of a mutual fund.