AUM stands for Assets Under Management.
It refers to the total market value of all the financial assets that a financial institution, investment firm, or fund manager manages on behalf of its clients. It’s a crucial metric that essentially tells you how much money an entity is handling for its investors.
Here’s a sample table for AUM:
Here’s a closer look:
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Who uses it? You’ll most commonly see AUM associated with:
- Mutual Funds: The total value of all the stocks, bonds, and cash held within a specific mutual fund scheme.
- Hedge Funds: The total capital they manage.
- Venture Capital and Private Equity Firms: The total funds they have raised and are investing.
- Wealth Management Firms/Financial Advisors: The total value of assets they manage for their individual clients.
- ETFs (Exchange Traded Funds): Similar to mutual funds, it’s the total value of assets within the ETF.
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What’s included? AUM typically includes all the assets that the firm or manager has discretionary control over for investment purposes. This can comprise:
- Stocks
- Bonds
- Cash and cash equivalents
- Real estate
- Derivatives
- Other alternative investments
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How does it change? AUM is a dynamic figure that fluctuates constantly due to:
- Market Performance: If the underlying investments (stocks, bonds, etc.) increase in value, AUM goes up. If they decrease, AUM goes down.
- Investor Flows: When new investors put money into the fund/firm (inflows), AUM increases. When existing investors redeem their units or withdraw money (outflows), AUM decreases.
- Reinvested Dividends: If dividends or interest earned by the assets are reinvested, they also contribute to the AUM growth.
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Why is AUM important?
- Size and Scale: AUM is a key indicator of the size and scale of an investment firm or a particular fund. A larger AUM often suggests a more established and successful entity.
- Credibility & Investor Confidence: A high and growing AUM can signal that many investors trust the fund manager’s expertise and track record.
- Economies of Scale: Larger AUM can sometimes lead to lower expense ratios for investors. This is because fixed operating costs (like research, administration, compliance) can be spread over a larger asset base, making the percentage fee per investor smaller.
- Revenue for the Firm: Investment firms typically charge management fees as a percentage of AUM. So, a larger AUM directly translates to higher revenue for the firm.
- Liquidity & Diversification: Funds with very large AUM may have greater flexibility to diversify their portfolios and handle large redemptions without disrupting the market or facing liquidity issues.
It’s important to remember that while a large AUM can be a positive sign, it’s not the only factor to consider when evaluating an investment. Fund performance, expense ratio, investment strategy, and the fund manager’s expertise are equally, if not more, important.
