‘Assets Under Management’ (AUM) is a tool to earn recurring streams of passive income with little or no capital at minimum risk.
For instance, investments in a unit trust fund are a part of the fund’s AUM. In brief, AUM is the size of a unit trust fund.
Here is a quick illustration:
Let’s say, Ian has a fund management license.
He creates ‘Ian’s Provident Fund’, a unit trust fund which invests in different asset classes namely, equities, bonds, and money market instruments in Asia-Pacific.
Ian hires digital marketers to promote his fund on social media. Now, you spot his advertisement and make an initial investment of RM10,000.
Many others follow suit. Now Ian has 10,000 people investing RM10,000 each in the fund, making his fund’s AUM RM100 million.
How Ian makes money from investors
First, Ian imposes a sales charge of 3% for every ringgit invested into his unit trust fund. In this way, he earns RM300 in sales charges from your RM10,000 investment.
Second, he charges an annual management fee of 1% based on the total value of your investments:
- Increase in value to RM15,000: Ian earns RM150 in annual management fees.
- Retain its Value at RM10,000: Ian earns RM100 in annual management fees.
- Drops in Value to RM5,000: Ian earns RM50 in annual management fees.
You can see that it doesn’t matter how the stock market performs. It can go up, down or sideways but Ian will always earn money from his investors as long as he can keep them invested in his unit trust fund.
How Ian keeps investors if the stock market crashes
Remember, a unit trust fund is a mid-to-long term investment.
Also, he may encourage investors to exercise dollar-cost-average (DCA) so that they buy more units in his fund, instead of cashing out.
Thus, Ian still earns sales charges from his investor although the stock market crashes.
Here is how the rich perceive unit trust funds:
- Leverage: You invest your own money to make money by investing in Ian’s fund. Ian makes money from your investments. Ian has no capital invested in his fund.
- Returns: You are likely to measure a fund’s performance based on capital gains. Ian makes profits in the form of cash flow from your investments into his fund.
- Stock market crashes: You keep an eye on the volatile stock market. Ian makes money regardless. His task is to keep you invested for the long-term.
Conclusion:
An AUM is an asset of the ultra-rich as they earn recurring risk-free passive income year-after-year from it.
This article first appeared in kclau.com
Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.