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What does assets under management mean?

Assets Under Management (AUM) is the market value of investments managed by a firm or person on behalf of clients. AUM is used to indicate the size of investments managed by a fund, portfolio manager, a venture capital, registered advisor or a brokerage firm. It can mean the total assets managed by a firm for all clients or a single client.

AUM is the amount with which the fund manager can transact in financial and physical assets on behalf of the clients. The transactions usually take place with the consent of the clients. However, in the case of mutual funds, the transactions take place based on the investment objective.

AUM calculation varies from company to company. However, broadly AUM is calculated by adding the market values of all the assets held by the fund. Hence the AUM will fluctuate daily as it incorporates capital appreciation/depreciation, dividends, reinvestment of dividends etc.

The value of AUM is increased due to capital appreciation, increase in investment by clients, dividends and reinvestment of dividends. The value of AUM can decrease due to a decrease in the market value of assets, redemptions from clients, and fund closures.

AUM helps in determining the strength of an investment company. It is often used as an indicator to measure the strength of an investment firm and also to attract new investors. Moreover, it is an indication to investors of a firm’s operations over its competitors. AUM is the basis of calculating management fees. As the AUM increases the management fees reduces. Hence it is the basis for the source of revenue for an investment company.

What is the difference between NAV and AUM?

Net Asset Value

The net asset value is the market value of each unit in a mutual fund. The per-unit value is the value of all the securities that a  mutual fund scheme holds.

To determine the Net Asset Value, we need to know the number of units issued by the scheme, the market value of all the securities, the liabilities associated. The mutual fund’s NAV is the total asset minus total liabilities. NAV computation is at a per-unit level. Hence, the net value (assets – liabilities) is divided by total units. Therefore, this is the net asset value per mutual fund unit.

NAV = [Assets – (Liabilities + Expenses)] / Number of units outstanding

Where,

Assets include the value of securities and cash. The securities in which the scheme has invested include all equity, bonds, debentures, commercial paper, and bills of exchange. Also, it includes the dividend earned and interest accrued.

Liabilities and expenses include the fund management expenses, interest payable, and money payable.

Asset Under Management (AUM)

Assets under management (AUM) is the total market value of the investments (securities) that are held by a Mutual Fund. In simple terms, it is the money that the mutual fund is managed for their clients/investors. The Asset Management Company (AMC) calculates their fees as a percentage of the total AUM. Also, AUM fluctuates on a daily basis. This is because of the price volatility in the securities that the fund invests in.

Therefore, AUM is the total value of the investments of a mutual fund, while the NAV is the per unit value of a mutual fund. NAV is determined by the total assets and liabilities of the fund. Both NAV and AUM fluctuate on a daily basis, as they depend on the market value of the securities.

What is the difference between NAV and market value?

Net Asset Value (NAV) is the value of each unit of a fund. The mutual fund’s NAV is the total asset minus total liabilities upon the total number of units. Hence it is the per value representation on the fund’s assets and cash. NAV is the per unit market value of all the securities that a mutual fund scheme holds.

NAV = [Assets – (Liabilities + Expenses)] / Number of units outstanding

On the other hand, market value is the price at which the securities in the fund are trading. In other words, it is the price at which traders buy and sell the shares during trading hours. The market value or price reflects the highest price that the buyers are willing to pay and the lowest price at which the sellers are willing to sell the share. Also, the traders determine the market value in the financial market. Therefore, the value depends on the supply and demand of the shares.

The market value of the securities or underlying assets changes every day. Therefore, accordingly, the mutual fund’s NAV also changes daily. The mutual fund houses disclose the Net Asset Value on a daily or weekly basis. The open-ended schemes disclose the NAV on all working days. On the other hand, close-ended schemes disclose the NAV weekly.

How do asset management companies make money?

An Asset Management Company (AMC) is a firm that pools money from various investors and invests in different asset classes based on the investment objective. AMCs invest money from their client to make money for them. They have experienced financial personnel that perform extensive research and pick the best asset classes and investment options for their clients.

The AMCs also provide various services like portfolio monitoring and revisions as and when required. Moreover, they offer value added services like providing investment proofs for tax filing, and account statements on demand.

For the services they provide, the AMCs charge a fee called fund management fee. This is the major source of revenue for them. Additionally, few portfolio managers also take a commission on the returns made on the portfolio.

Why is asset management important?

Asset management is a process of planning, operating, managing, and maintaining, assets in an efficient manner so that the returns are maximum, and costs are minimum. It enables the firm to keep track of all assets and guarantees the accuracy of amortization rates. It also helps in identifying and managing the risk and removes ghost assets from the inventory.

Keep track of all assets

Through asset management, a firm can keep track of all the assets. One can easily tell where the assets are located, how are they used and when the changes are made to them. By using this data, the firm can maximize returns and minimize costs.

Identifying and managing risk

Owning and managing assets will have a certain risk attached to them. Asset management will help in identifying these risks and will also come up with solutions to avoid such risks.

Removes ghost assets from inventory

Ghost assets are the assets that are lost, unrecorded, damaged or stolen. Asset management helps in identifying these ghost assets. And the same can be recorded in the financial statements.

Published on November 9, 2020