Asset Management Company (AMC) – Its Definition and How It Works
An Asset Management Company, abbreviated as AMC, refers to a firm that pools funds from the investors and invests them into various investment options such as debt, equities, real estate, gold, etc. Generally, AMCs are discerned by their Assets Under Management (AUM), in other words, the number of assets that they manage. There could be numerous funds with different investment objectives managed by an AMC. AMCs colloquially are referred to as money/fund managers, money management firms, investment companies, or mutual fund companies.
The fund managers who run an AMC, before jumping to a conclusion on which investment strategy to opt for, they first set the investment objective and evaluate the market risk and reward profile. For example, a debt fund of an AMC will primarily invest in bonds and government securities, and the investment objective will be to generate moderate returns but at minimal risk. It's always a wise decision to seek a financial expert's advice for managing your funds if you don't have much knowledge of how the stock markets function.
In this blog, Fintra will share brief knowledge about AMCs by highlighting the following topics:
- What Is An Asset Management Company (AMC)?
- The List of Asset Management Companies (AMCs)
- How Does An Asset Management Company (AMC) Manage The Funds?
- On What Basis Should In Investor Choose An Asset Management Company (AMC)?
- Who Regulates The Asset Management Companies?
- Are AMCs As Reliable As Banks?
- What Role The Securities and Exchange Board of India (SEBI) And Association of Mutual Fund of India (AMFI) Play In Asset Management Company (AMC) Operations
- The Basic Securities and Exchange Board of India (SEBI) And Association of Mutual Fund of India (AMFI) Guidelines An Investor Must Know
- The Pros And Cons of Asset Management Company (AMC)
What Is An Asset Management Company (AMC)?
An Asset Management Company (AMC) is a firm that pools funds from various individuals and institutional investors and invests in various securities. The company invests the funds in stocks, real estate, bonds, master limited partnerships, and various other capital assets. Along with high-net-worth individual (HNWI) portfolios, an AMC also manages hedge funds and pension plans. In attempts to better serve the smaller investors, AMCs also creates pooled structures like index funds, mutual funds, or exchange-traded funds (ETFs) that they can easily manage in a single centralized portfolio.
Since AMCs has a larger pool of resources than an investor could access by themselves, AMCs provide investors more diversification and investing prospects. The AMCs have fund managers who're professionals, and they manage the investment; the research team is in charge to select the right securities. Fund managers select the investment options that blend well with the fund's objectives. For example, a debt fund will generally invest in bonds and government securities to protect the investment and earn a steady return. On the other hand, an equity fund will mainly focus on investing in shares of companies to maximise the returns for the investors.
Since the AMCs assists in buying for so many clients, it enables them to practice economies of scale, and through it, they get a price discount on their purchases. With AMC's assistance, which takes care of paying out proportional returns and pooling assets, investors can also avoid the minimum investment requirements that are required while purchasing securities by themselves. Investors even get to invest in larger assortment of securities with just a smaller amount of investment funds. It's believed that the AMC managers get compensated through fees, usually, it is a percentage of a client's assets under management. Moreover, the AMCs are held to a fiduciary standard.
The List of Asset Management Companies (AMCs)
- Axis Mutual Funds
- Kotak Mutual Funds
- Nippon India Mutual Funds
- HDFC Mutual Funds
- SBI Mutual Funds
- ICICI Prudential Mutual Funds
- Aditya Birla Sunlife Mutual Funds
- UTI Mutual Funds
- Franklin Templeton Mutual Funds
- IDFC Mutual Funds
- DSP Mutual Funds
- Tata Mutual Funds
- L&T Mutual Funds
- PGIM India Mutual Funds
- Sundaram Mutual Funds
- Invesco Mutual Funds
- LIC Mutual Funds
- JM Financial Mutual Funds
- Baroda Mutual Funds
- Canara Robeco Mutual Funds
- HSBC Mutual Funds
- IDBI Mutual Funds
- Indiabulls Mutual Funds
- Motilal Oswal Mutual Funds
- BNP Paribas Mutual Funds
- Mirae Asset Mutual Funds
- Principal Mutual Funds
- BOL AXA Mutual Funds
- Union Mutual Funds
- Taurus Mutual Funds
- Edelweiss Mutual Funds
- Navi Mutual Funds
- Mahindra Mutual Funds
- Quantum Mutual Funds
- PPFAS Mutual Funds
- IIFL Mutual Funds
- Quant Mutual Funds
- Shriram Mutual Funds
- Sahara Mutual Funds
- ITI Mutual Funds
- Reliance Mutual Fund
- Principal Mutual Fund
- Yes Mutual Fund
- Essel Mutual Fund
How Does An Asset Management Company (AMC) Manage The Funds?
When investing in an Asset Management Company (AMC), one is basically investing in a fund managed by the AMC. The firm is primarily responsible for driving the mutual fund and making determinations that benefit the investors. Since the returns of the funds are market-linked, thus, it depends on the fund's performance, and a well-managed fund does have the potential to deliver relatively higher returns. In return for this, the fund charges a small fee known as the fund management fee, and this is the prime source of revenue generation for the AMC. It is expected that a fund, in its category, will generate competitive returns to maximize its subscribers and hence, the revenue.
Under the leadership of the fund manager, it will invest the funds that are in line with the objectives The market reputation of the AMC plays a vital role while choosing a fund for investment. Investors will naturally trust those funds managed by reputed AMCs. To further strengthen its investor's base and deliver quality returns, AMCs follows a comprehensive process that is listed below:
- Asset Allocation: For maintaining the investor's trust, an AMC is responsible for judiciously investing the investor's funds in various types of investment instruments. Speaking about Mutual Funds, they have a certain investment objective that enables the fund manager to decide on the assets in which the investments can be made. As an example, debt-oriented funds mostly have a substantial proportion of their assets under management in bonds and other fixed-income securities. Moreover, the balanced funds mostly get invested in a mix of stocks and fixed income securities. Thus, the allocation of assets amongst equity and debt depends on the market conditions and prospective interest rates.
- Research and Analysis: The most crucial decision an AMC has to take is creating an investment portfolio. Building the fund’s portfolio involves lots of research and analysing the performance of the asset classes. First, the experts have to study the market, micro and macro-economic aspects before giving the reports to the fund manager. Upon receiving the reports, the fund manager will eventually make investment decisions based on the fund's objectives. Through this process, a company builds a portfolio that predominantly depends on the experience and expertise of the fund manager.
- Performance Review: AMCs are required to furnish the unitholders with information that has a direct impact on their mutual fund holdings. They must even send regular updates on sales and repurchases, portfolio details, NAV, and so on to the investors. In simple terms, AMCs must answer to the investors of the mutual funds and take care of their interests. They also have to attend to customer grievances regarding their mutual fund schemes. Mutual funds, Exchange Traded Funds (ETFs), Index Funds, etc are all examples of the various types of funds managed by AMC.
On What Basis Should In Investor Choose An Asset Management Company (AMC)?
Before choosing an AMC, it's vital to check the track records of the AMCs and the assets under management (AUM). This enables the person to select an AMC with large assets under management, which is capable to handle the sudden redemption pressure of large investors. Market-savvy investors may also check the performance history of various mutual fund schemes managed by the AMC during market ups and downs to get the idea of performance across market cycles.
The following are some points that investors can consider while choosing an AMC:
The AMC's Reputation: A fund house doesn't earn its status overnight, it takes months and/or years to do so. For example, an AMC gets its good reputation after performing consistently over 5 or 10 years.
Check the reviews: Always talk to other investors, and check if the past performance of an AMC has been consistent. Even check if there's any grievance against the AMC.
Credibility of the Fund Manager: One should also check the fund manager's track record and investment style. There are numerous mutual fund schemes whose performance is dictated by the investment styles and skills of the fund manager. Bear in mind that if you are not comfortable with the fund manager's investment style, then don't proceed to invest in a mutual fund. You'll also notice that mutual funds will display the style box to assist you to gauge the fund manager's investment style.
Price and Value: Before selecting any fund, as an investor, you must look at the price of the fund and the value creation along with the returns that the fund offers.
Fees and Commission: Some AMCs has a fixed fee for providing their services and some charge a commission based on the returns earned on the fund. Hence, opting for a fixed fee is considered over commission because that way you as the investor will know the outflow amount beforehand.
Who Regulates The Asset Management Companies?
The capital market regulator, Securities and Exchange of India (SEBI), regulates an Asset Management Company (AMC). To protect the interests of the investors, AMCs are even passively regulated by the Association of Mutual Fund of India (AMFI).
Are AMCs As Reliable As Banks?
There is a widespread conception regarding mutual funds not being as safe as bank accounts or investment schemes offered by banks. People have a fear AMCs can shut down at any time or run away with their money, because all banks are regulated by the Reserve Bank of India (RBI) and people. However, individuals often tend to overlook the fact that it's the SEBI that governs and controls the mutual funds along with the AMCs, and AMFI looks after the investor's education and interests.
Under the Companies Act, 1956, a sponsor creates or sets up an AMC. Then, the AMC charges a fee and acts under the supervision of the trustees, who are regulated by SEBI. The primary reason for this is to ensure transparency and objectivity with the AMC's operations.
What Role The Securities and Exchange Board of India (SEBI) And Association of Mutual Fund of India (AMFI) Play In Asset Management Company (AMC) Operations
All AMCs work under the board of trustees' supervision, but they are answerable to the Securities and Exchange Board of India (SEBI), India’s capital market regulator. The Association of Mutual Funds in India (AMFI) is another statutory body formed by mutual fund firms, which addresses the investors’ grievances and looks after their interests. Every mutual fund house is required to comply with the set of risk management guidelines by SEBI and AMFI.
Since SEBI is a government body, the mutual fund companies formed the AMFI. Both of these together keep the functioning of the industry ethics-driven and transparent. Even the RBI plays an essential role in regulating AMCs, and mutual funds do require approvals if they are launching guaranteed schemes. The Ministry of Finance works as the authority for all these regulators.
The Basic Securities and Exchange Board of India (SEBI) And Association of Mutual Fund of India (AMFI) Guidelines An Investor Must Know
Following are some of the guidelines and practices for mutual fund companies that SEBI, AMFI, and RBI mandate:
- For any mutual fund, an AMC shall not serve as the trustee
- The company will not invest in its schemes unless full disclosure of its intention to invest has been revealed in the offer documents
- They have to submit quarterly reports about their activities and compliance with these regulations to trustees
- An AMC's key personnel should have a clean record- It should not have had convicted economic offence like fraud or insider trading
- The AMC's Chairman will not be a trustee of any mutual fund
- The AMC must have a net worth of less than Rs 10 Crores
- SEBI has drafted some guidelines for the reports which has to be submitted by the AMCs to the trustees. On a bi-monthly basis, AMCs have to submit the compliance certificate to the trustees
The Pros And Cons of Asset Management Company (AMC)
There are various pros and cons associated with AMCs and they can be read below:
Conclusion
As the above information reveals, AMCs aims and focuses on providing sustainable, consistent, and long-term risk-adjusted returns by following the underlying principles of capital growth and capital preservation in three product offerings - private equity, long-only, and alternate strategies. Each one of these offers a distinctive investment objective and an independent investment team, which provides the investors with the ability to participate in growth areas of their choice.
Although there’re various pros and cons of AMCs, always do thorough research and gain some good basic knowledge on the subject related to stocks and mutual funds. After doing this, you'll be in a better position to decide which AMC to opt for and fund manager. Since the SEBI regulates AMCs and is passively regulated by the AMFI as well, you can feel safe to take the help of any AMC to handle your funds and investments wisely. Moreover, remove the fear that AMCs can shut down at any time or run away with your money because the fact is SEBI regulates the mutual funds, and AMFI looks after the investor's interests. Always remember the regulatory bodies SEBI, AMFI, and RBI are governed by RBI.
