Asset management companies (AMCs) are firms pooling investments from various individual and institutional investors. The company manages the investment by investing in capital assets such as stocks, real estate, bonds, and so on. The asset management companies have professionals called fund managers who decide where the pooled money is invested. Fund managers identify the investment options that are in line with the objectives of the investors. Asset management refers to the management of investments on behalf of others. The process essentially has a dual mandate - appreciation of a client's assets over time while mitigating risk. There are investment minimums, which means that this service is generally available to high net-worth individuals, government entities, corporations and financial intermediaries.
The role of an asset manager consists of determining what investments to make, or avoid, that will grow a client's portfolio. Rigorous research is conducted utilizing both macro and micro analytical tools. This includes statistical analysis of the prevailing market trends, interviews with company officials, and anything else that would aid in achieving the stated goal of client asset appreciation. Most commonly, the advisor will invest in products such as equity, fixed income, real estate, commodities, alternative investments and mutual funds.
Because they have a larger pool of resources than the individual investor could access on their own, asset management companies provide investors with more diversification and investing options. Buying for so many clients allows AMCs to practice economies of scale, often getting a price discount on their purchases. Pooling assets and paying out proportional returns also allow investors to avoid the minimum investment requirements often required when purchasing securities on their own, as well as the ability to invest in a larger assortment of securities with a smaller amount of investment funds.
In some cases, AMCs charge their investors set fees. In other cases, these companies charge a fee that is calculated as a percentage of the client's total assets under management (AUM).
How does an AMC manage the funds?
When you invest with an AMC, you purchase a portfolio they offer. The company is principally responsible for driving the mutual fund and making decisions that benefit the investors. Under the leadership of a fund manager, it invests the money in line with the trust deed and the financial objective of the scheme. The process is broadly listed below.
a. Asset Allocation
Each mutual fund comes with a particular financial goal or a theme, which helps the fund manager to decide on the assets on which the investments can be made. For example, most debt-oriented funds do not invest more than 20% of their assets under management in equities. Another example is that most balanced funds invest only 60% of assets in equities.
b. Research and Analysis
Building the fund’s portfolio rides a lot on researching and analysing the performance of the asset classes. Experts study the market, micro and macro-economic aspects and fund performances regularly, and pass the reports to the fund manager, who then make decisions to generate good returns.
c. Portfolio Construction
An AMC typically has researchers and analysts who report their market findings and trends to the fund manager. Based on these findings and investment objectives, the fund manager then chooses the securities to buy or sell. This is how a company builds a portfolio, which depends predominantly on the experience and expertise of the manager.
d. Performance Review
Despite the disclaimers in the fine print, AMCs face a lot of hostility from the investors and trustees, when it is not able to justify its investment decisions. For instance, the company must provide unitholders with information that have a direct impact on their holdings. It must also send regular updates on sales and repurchases, NAV, portfolio details, and so on to investors.
Role SEBI & AMFI in AMC Operations
An AMC works under the supervision of the board of trustees. But, they are answerable to India’s capital market regulator, the Securities and Exchange Board of India (SEBI). The Association of Mutual Funds in India (AMFI) is another statutory body that addresses investors’ grievances. Every fund house must comply with the set of risk management guidelines by SEBI and AMFI.
While SEBI is a government body, mutual fund companies have formed the AMFI. Together, they keep the functioning of the industry ethic-driven and transparent. RBI also plays an essential role in regulating AMCs, if a bank is one of the sponsors. Finally, the Ministry of Finance works as the authority for all these regulators.
SEBI and AMFI guidelines investors should know
The following are some of the practices and guidelines for mutual fund companies that SEBI, AMCI, and RBI mandate: a. An AMC shall not act as the trustee of any mutual fund. b. The company shall not invest in any of its schemes unless full disclosure of its intention to invest has been made in the offer documents. c. They shall submit quarterly reports on its activities and the compliance with these regulations to the trustees. d. Key personnel of an AMC should have a clean record (not convicted of any economic offence). e. The Chairman of the AMC shall not be a trustee of any mutual fund. f. The AMC should have a net worth less than Rs.10 crores.