Asset Management Company (AMC)
Mr Patel wants to build a portfolio of stocks. However, he does not have enough funds to build a diversified portfolio comprising equity shares of top listed companies. In that case, he may choose to invest in a mutual fund scheme offered by Asset Management Companies.
Asset Management Companies (AMC) pool funds from many clients to invest in different financial instruments, such as stocks, government bonds, debentures, etc. Also referred to as fund houses, AMCs have fund managers with the relevant expertise and resources to generate consistent returns keeping the scheme’s objective in mind.
Mr Patel can choose a fund management company to invest his money on his behalf for a fee.
Now let us take a more detailed look into AMCs.
What is an Asset Management Company (AMC)?
An Asset Management Company or AMC aims to pool funds from individual and institutional investors. The accumulated fund is then invested in various investment options like equity, debt, gold, real estate, etc. on the behalf of its investors. In return, the AMCs charge a nominal fee from the investors. This fee is the primary source of revenue for an AMC.
Asset management companies employ professional fund managers who are responsible for maintaining portfolio diversity by investing in both high-risk and low-risk options and ensuring returns as per investors’ requirements. Additionally, fund managers are responsible for setting an investment objective and assessing various market risks. In short, they formulate the entire investment strategy.
How Do Asset Management Companies Work?
AMCs are money-management entities that pool funds from individual and institutional investors and invest in different financial securities. These companies offer various financial products that invest the pooled funds through different investment strategies.
These fund management companies employ professional fund managers with broad market expertise. These experts utilise different investment strategies in line with the funds’ objectives to build a diversified portfolio and manage the pooled capital.
For a debt fund, fund managers would invest in debt instruments like government bonds and money market instruments. Whereas, for equity funds, they would invest in equity shares of companies as per the investment objectives of the pooled funds.
For their services, they charge a certain percentage of the AUM (assets under management) as fees. AUM is the total capital that a fund management company raises from different investors.
Asset Management Companies are held to a high legal standard. These companies must act in the best interest of their clients and avoid conflicts of interest. In India, AMCs are regulated by SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of India) when providing a guaranteed returns scheme.
How Are the Funds Managed by an Asset Management Company?
AMCs follow the given processes to generate returns for their investors as per a scheme’s predetermined objective:
1. Research and Analysis
A lot of research and analysis of asset classes goes behind the allocation of funds. Fund managers study market trends, political factors, micro and macro-economic factors to make investment decisions.
2. Asset Allocation
After thorough research, fund managers decide the asset allocation based on the fund’s investment objective. For example, they will invest primarily in highly rated bonds and fixed-income securities in the case of debt mutual funds.
3. Building a Portfolio
After the two above processes, the fund manager will build a portfolio of investments based on market findings. He/she will make decisions about choosing which security to buy, sell or hold using his/her market expertise.
4. Reviewing the Performance
Since AMCs are responsible for managing investors’ funds, performance review of portfolios is quite important. That is why asset managers must provide information on NAV, portfolio details regarding sales and repurchases to investors.
What are the Types of Asset Management Companies?
Given below are all the different types of AMCs:
- Mutual funds
- Exchange-traded funds
- Index funds
- Hedge funds
- Private equity funds
- Other funds
Who Regulates Asset Management Companies in India?
The Securities Exchange Board of India (SEBI) is responsible for regulating Asset Management Companies in India. SEBI issues regulations that protect the interests of investors. All AMCs must comply with SEBI guidelines and rules.
In addition, the Association of Mutual Funds of India (AMFI) passively regulates AMCs to protect investors’ interests. The Reserve Bank of India (RBI) and India’s Finance Ministry also play a minor role in regulating AMCs.
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Pros and Cons of Asset Management Compnies
Discussed below are the pros and cons of AMCs:
Pros
The pros are as follows:
1. Well-diversified Portfolio
An AMC maintains portfolio diversity which mitigates the market-related risks of investments. Moreover, investors do not have to take the burden of evaluating and choosing the various investment instruments for reaping benefits from their investments.
2. Expertise of Fund Managers
Professional fund managers are responsible for the management of the funds and formulating investment strategies. They have extensive knowledge and sound experience in dealing with various risks. With their expertise, fund managers help in maximising returns.
3. Economies of Scale
Asset Management Companies get the benefit of large funds. They use it to procure high-quality assets and securities efficiently. Please note that AMCs focus on procuring assets and securities, which reduces the overall operation cost.
4. Balanced Investments
Investors who invest through an AMC benefit from a refined balance between debt and equity instruments.
Cons
The cons of investing via AMCs are as follows:
1. Risk of Operational Problems
The massive scale of operations and capital investments may hinder the fund’s performance. Additionally, fund managers may find it difficult to manage the funds adequately in relation to market volatility. This may reduce the fund’s performance.
2. Risk of Underperforming
Though portfolio diversification aims to mitigate risks, the risk of underperformance never really goes away.
3. High Management Fees
Irrespective of the fund’s performance, investors need to pay a management fee, which can be high depending on the type of fund. If a fund fails to perform well, the high management fee further reduces the investors’ returns.
How to Choose an Asset Management Company?
1. AUM (Assets Under Management)
Having a large amount of pooled funds enables AMCs to reduce its fund expenses, which reflects in the fund’s returns. Moreover, it helps them handle the sudden pressure of redemption from large investors.
2. Credentials of the Fund Managers
The fund manager is responsible for all investment decisions. Hence, you should always check the track record and investment style of funds managers on AMC’s website before allocating your savings to any mutual fund scheme.
3. AMC’s Market Reputation
Fund management companies do not earn their reputation in a day. They need to deliver consistent returns and have a clear track record for years to build a reputation. In that regard, investors should go through AMC’s annual reports and compliance reports before making a decision.
Why Should You Invest via AMC?
1. Economy of Scale
This refers to advantages gained from increasing the scale of operations. When the scale of operations increases, the per-unit cost with regard to operations is lower. AMCs can offer attractive returns for their investment products as they can purchase financial instruments in large quantities and negotiate favorable commission prices.
2. Expert Money Management
AMCs employ fund managers and financial experts with extensive experience in managing investments. They often hire services of leading experts specializing in specific asset classes such as debt, real estate and equity.
3. New Investment Opportunities
They provide access to various stocks that individuals may not be able to invest in individually. For example, a fund management company can invest in stocks belonging to booming sectors that require a substantial amount of funds.
4. Reduces Risk Exposure
When many individual investors combine funds, it results in a considerable amount of money. This allows AMCs to invest in a wide variety of asset classes and subclasses. If some of the portfolio constituents underperform, other holdings can make up for it.
Role of AMFI, RBI and SEBI in the Operations of AMC
The Association of Mutual Funds in India (AMFI), the Reserve Bank of India (RBI), and the Securities Exchange Board of India (SEBI) have mandated the following guidelines that AMCs need to follow:
- Asset Management Companies (AMCs) cannot serve as a trustee of any mutual fund.
- They must regularly submit quarterly reports on their activities and compliance with regulations to the trustees.
- The chairman of an AMC will not be the trustee of any mutual fund.
- AMCs cannot invest in any of their own schemes unless and until they disclose their intention to invest in the offer documents.
- The people employed by an AMC, especially the key personnel, must have a clean record. In other words, they should not be convicted of offences like economic fraud and insider trading.
- AMCs need to follow SEBI’s guidelines while submitting reports to their trustees. They need to submit their compliance certificate to their respective trustees every other month.
- The net worth of AMCs should not be less than Rs.10 crore.
Final Word
There are more than 40 AMCs in India registered with SEBI. You may want to take a careful look at the above factors before purchasing any financial product of an AMC online. In addition, you should check the fees that the AMC charges for its services.
Frequently Asked Questions
Ans: Yes, like banks, AMCs too are regulated by government authorised bodies. The capital market regulator SEBI and AMFI (Association of Mutual Funds in India) regulates AMCs in India. These companies must adhere to SEBI guidelines and regulations and make regular disclosure to investors.
Ans: AMFI is a statutory body formed by mutual fund companies in India to address investors’ complaints. Its main function is to make sure that the mutual fund industry functions along ethical lines and in the interest of investors.
Ans: Asset Management Companies are buy-side companies as they help clients to purchase investment products. In comparison, sell-side firms include stockbrokers and investment banks that help to sell investment products and services to buy-side companies and investors.
Ans: SEBI lays down risk management guidelines that every AMC in India must follow. Moreover, SEBI regulates the trustees of all mutual fund companies, who in turn supervise the actions. SEBI also requires AMCs to submit quarterly reports on its activities and submit compliance certificates to trustees.
Ans: An AMC raises money from investors for a new mutual fund scheme through an NFO (New Fund Offer). This is a process where the fund offer opens for around 15 days allowing investors to enter the scheme. To get permission for an NFO, AMCs need to submit documents such as SID (Scheme Information Document) and KIM (Key Information Memorandum) to SEBI.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
