What is an Asset Management Company (AMC)?
An AMC is an Asset Management Company that invests the funds collected from the investors in various asset classes like equities, debt, cash, gold, etc. A Single AMC can introduce and manage multiple funds with varied investment objectives, risk profile, returns expectations, etc.
Different Types of Asset Management Companies
In India, there are different types of AMCs that cater to the diverse needs of investors. Here are some of the categories of asset management companies in India:
Mutual fund AMCs – These are the most common type of AMCs in India. They manage mutual funds, which are investment vehicles that pool money from multiple investors to invest in stocks, bonds, and other securities.
Pension fund AMCs – These AMCs manage investments for pension funds. Pension funds are designed to provide income to retirees.
Insurance company AMCs – These AMCs manage investments for insurance companies. Insurance companies invest their premiums in various assets to generate returns.
Private equity AMCs – These AMCs manage investments in private companies that are not publicly traded on stock exchanges.
Real estate AMCs – These AMCs manage investments in real estate, such as commercial properties and residential buildings.
Alternative investment AMCs – These AMCs manage investments in unconventional assets, such as commodities, hedge funds, and art.
Each type of AMC has its own investment philosophy and objectives. Investors can choose an AMC based on their investment goals, risk appetite, and preferred asset class.
How does AMC manage funds?
The primary role of the AMC is creating and increasing investor’s wealth. By investing in an AMC or a fund managed by an AMC, the investors are provided with returns based on the performance of the fund. In exchange, AMCs charge the investors a nominal expense ratio which is expressed as a percentage of the total assets of the fund.
The core functions of an AMC can be summarized hereunder.
Optimum asset allocation
The professional experience and the expertise of the fund managers are keys to the optimum allocation of funds across various assets. The fund managers have to strike a refined balance between debt and equity instruments to meet the objective of the fund as well as the investor’s returns expectations. This balance is achieved after considering the market fluctuations and the prevailing inflation in the country along with assessing the impact of global markets.
Sound investment portfolio
A sound investment portfolio is one that can more or less withstand the market fluctuations and still give adequate returns. The AMC has to ensure that they tailor the portfolio after careful research and analysis of the market trends and other relevant factors to minimize the risks while maximizing the returns avenues.
This is another crucial aspect of any AMC. While providing good returns is the key function of any fund house, the review of the performance is equally essential to ensure that they have not deviated from the fund objectives. This review is based on the returns generated by the fund over a period of time, the allocation of the assets across various classes, the current NAV, etc.
Advantages of an AMC
There are multiple advantages of AMCs which are highlighted below.
1. A diversified portfolio
Investing through an AMC ensures that the investors get the maximum benefit of a diversified portfolio. Investors are free form the burden of carefully analysing and choosing various securities to invest in with the aim to maximize their wealth.
2. Professionally managed assets
Professional expertise is one of the key highlights of AMCs. These fund houses hire professionals with extensive experience and a sound knowledge of markets and the inherent risks involved while investing in market related securities. This expertise provides an edge to the investors rather than going through the efforts of studying the markets for years to make sound investment decisions.
3. Economies of scale
The very definition of economies of scale is the benefit of reducing expenses by increasing the scale of operations. AMCs have the benefit of large funds that can be used to procure quality assets or securities that are otherwise not possible for retail investors to tap into. The reduced overall costs of operations are one of the strong benefits of AMCs.
Disadvantages of an AMC
After discussing the advantages of the AMCs let us look at some of its disadvantages.
High management fees
The most obvious or common disadvantage of AMCs is the high management fees to be paid to avail the services of the fund managers. These charges are to be paid irrespective of the performance of the fund. If the fund does not perform well, the high management fees can further reduce the returns of the investors.
1. Risks of underperforming
The evaluation of the fund is against its benchmark and is subject to market fluctuations. The risk of underperformance is an inherent risk that has to be mitigated by the investors by diversifying their investment portfolio.
2. Risk of operational problems
The huge scale of operations and the scale of capital investments can be a hindrance in the performance of the fund. The asset managers may not be able to manage the funds effectively in relation to the market volatility which may lead to a reduction in the ultimate returns for the investors.
How to select a reliable AMC?
There are various factors that have to be considered by the investors before selecting an AMC. Some of these factors are mentioned below,
- The reputation of the fund house
- Historical performance of the fund over the past 5 years or 10 years
- The credibility of the fund manager to generate adequate returns and mitigate risks
- Cost benefit analysis i.e., comparison between the returns generated by the fund and the expenses of the fund.
- Pattern of charges levied by the fund (whether fixed or as a percentage). Funds charging fixed fees are usually proffered as the outflow is predictable and limited.
The AMCs are the hidden faces behind the performance of the fund. Investors have to ensure that they go by the performance of the fund before selecting or investing in it rather than just by the name of the AMC.
1. Who is the governing body of the AMCs?
SEBI (Securities Exchange Board of India) and AMFI (Association of Mutual Funds in India) are the governing bodies of all AMCs.
2. What is the minimum net worth requirement of any AMC?
The minimum net worth requirement of any AMC is Rs. 100 crores
3. What are the fixed charges levied by the AMC?
Fixed charges are the monthly or quarterly charges levied by the fund house to manage the assets or portfolio of the investors.