Financial institutions such as mutual funds or banks manage a variety of securities on behalf of their clients. The term "assets under management" (AUM) describes the total amount of those assets managed by a particular bank or fund.
Whether you're thinking about a mutual fund or looking closer at one in which you already own shares, it's important to know what is included in this definition. Knowing the details can help you make good decisions about buying mutual funds.
What Is Assets Under Management?
For a mutual fund, brokerage, or portfolio manager, assets under management (AUM) is the total dollar amount of all assets in the fund. This can be the AUM for one client or for the entire fund portfolio. In this way, AUM helps show the size of an investment company or product or the size of an investor's portfolio.
AUM can fluctuate daily based on what investors buy or sell; it can also be impacted by changes in share value over the course of the day.
- Acronym: AUM
- Alternate name: Funds under management
How Does Assets Under Management Work?
Let's say you buy $10,000 worth of shares in a mutual fund. That money is added to the total AUM of the fund. The company will use your money to buy more securities for the fund; then that $10,000 will grow or shrink. It depends on how the fund performs.
Now, let's look at it from the individual angle. Say that $10,000 in shares you bought was on top of $50,000 you already owned. That would make your total AUM with that mutual fund $60,000.
Why Is AUM Important?
Knowing a mutual fund's AUM can be useful. That's because a larger AUM amount can become a drag on the fund's performance. It can make it more difficult to manage.
A high relative size of net assets can also force a fund into a different style or category. For instance, a small-cap stock fund with $1 billion in net assets may not perform as well as a small-cap stock fund with $500 million in net assets.
This is because large investments in small companies can actually adversely affect the share price of the small company being bought or sold in the fund. For this reason, small-cap stock funds that have high net assets tend to buy stocks of large-cap companies. This can cause the fund to evolve into a mid-cap stock fund. It ends up getting away from the fund's initial focus. This is called style drift.
You may be charged fees as a percentage of your total AUM. This often decreases as AUM increases.
AUM vs. NAV
A mutual fund's total AUM is not to be confused with net asset value (NAV). NAV represents the total assets minus liabilities. This can be used to calculate how much a share of the particular fund is worth. Like AUM, this fluctuates daily as total assets and liabilities change.
How Can You Evaluate Total AUM?
Size is relative. It helps when you understand what qualifies as too much by comparing to averages, or apples to apples, so to speak. For instance, total AUM for an average large-cap stock fund can be in the range of $500 million.
The largest large-cap stock funds can have more than $50 billion under management. But bigger is not always better. It's helpful to look for average to below-average AUM for a mutual fund. It most often holds that the smaller the capitalization of a fund, the lower the AUM an investor will seek.
But very low AUM, such as $10 million or less, can be cause for caution. Again, refer to the AUM averages for other funds within your target fund's category. This is what can help you make comparisons when it comes to average or below-average AUM.
Note that the size of an index fund's total AUM will not often affect its performance as it will for an actively managed mutual fund. In fact, many actively managed large-cap stock mutual funds with high relative AUM often begin to perform like an index fund. That's because the manager is forced to buy stocks that are in the index.
- A mutual fund's assets under management (AUM) is the total amount of all securities managed by the fund.
- It can also represent the total amount of investments that are managed for one investor.
- AUM can give you insights into a fund's potential performance.
- Investors will often receive fees as a percentage of their total AUM.