Assets Under Management (AUM) plays a crucial role in the investment industry. It’s a financial metric used to quantify the total market value of assets managed by financial institutions on behalf of their clients. Let’s take a closer look at AUM, its significance, its calculation methodology, and its role in evaluating the success and competitiveness of investment firms.
What is AUM?
Assets Under Management refers to the total value of assets that a financial institution manages on behalf of its clients at a specific point in time. It encompasses a diverse range of assets, including stocks, bonds, cash, real estate, commodities, and other investments actively managed by the institution. AUM serves as a measure of the institution’s size, scale, and market presence.
Calculation of AUM
This involves the summation of the market values of all individual assets within the institution’s portfolio. The calculation includes all client investments and excludes the institution’s own capital or assets. Abhay Bhutada, MD of Poonawalla Fincorp, said that in 2022, they did 37% AUM growth thanks to the consumer and MSME segment. This shows that even two factors can greatly impact an institution’s AUM.
Regular portfolio valuation and reconciliation processes are conducted to ensure accurate AUM reporting and provide clients with a clear picture of their investments. Market values are typically determined by considering the prevailing market prices of the assets on the valuation date.
Significance of AUM
Firstly, it serves as the basis for determining the fees charged for managing client assets. Fee structures are commonly designed as a percentage of AUM, providing institutions with an incentive to grow their AUM to increase fee revenue. Secondly, AUM is often regarded as a measure of an institution’s success, scale, and market influence.
Larger AUM figures are associated with greater resources, potential profitability, and the ability to attract more clients. However, it is crucial to consider AUM alongside other performance indicators for a comprehensive evaluation.
Types of AUM
AUM encompasses a wide range of assets managed by financial institutions. These can include equities (stocks), fixed-income securities (bonds), money market instruments, derivatives, real estate investments, and other financial instruments. The diversification of asset classes allows institutions to tailor investment strategies to meet client objectives while effectively managing risk.
The composition of AUM can vary among institutions based on their specialization, client preferences, and market conditions. The ability to offer a diversified set of asset classes can attract a broader client base and contribute to the institution’s profitability.
AUM and Performance Evaluation
While AUM is often used as a measure of success, it should not be the sole factor in evaluating an investment institution’s performance. For example, let’s talk about mutual funds for a while. Those with commendable AUM in India are from SBI, ICICI Prudential, HDFC, Kotak, and Nippon.
As we said, AUM alone does not provide a complete picture of investment returns or the quality of investment management. It is essential to analyze investment performance, risk management, and other factors in conjunction with AUM. Once you do all this, you might realize that there could be even better mutual funds than the ones we listed above.
AUM for Industry Comparison
Comparing AUM figures is a common practice to evaluate the size, market presence, and competitiveness of financial institutions within the investment industry. AUM provides insights into an institution’s relative position, growth potential, and ability to attract and retain clients. A thorough analysis should consider multiple factors beyond AUM to gain a comprehensive understanding of each institution’s strengths and weaknesses.
AUM is important in the investment industry, representing the total market value of assets managed by financial institutions on behalf of their clients. It serves as a measure of an institution’s size and market presence. Although a comprehensive evaluation should consider factors beyond AUM to gauge the performance of investment firms.