1. What is an Asset Management Company?
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.
The fund manager first evaluates various metrics such as market and industry risks, before making a decision that is in line with the investment goals. For instance, a debt fund invests mostly in bonds and government securities to keep the risks minimal. But an equity fund mainly focuses on equities (shares) of companies. The ultimate aim here is to make profitable investment decisions that will give investors maximum returns.
2. 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.
3. On what basis should an investor choose an AMC?
While AMCs follow the investment objective of every scheme before investing, you still are needed to check its track record. Market savvy investors can also look at the performance history of various schemes managed by the company during both market ups and downs.
Investors can consider the following points while choosing an AMC:
The reputation of the AMC: A fund house does not earn its status in a day; it takes months or years. For example, a company gets a good reputation after performing consistently good for say, 5 or 10 years. Check the reviews, talk to other investors, and check if the past performance has been consistent.
Fund manager’s credentials: An AMC is what a fund manager is. For instance, with the fear of losing customers, no fund house will hire a manager with less-than-impeccable expertise. Nowadays, it is easy to find how a fund manager has managed assets in the past.
Fees vs commission: It is advisable to choose an asset management company that charges a fixed fee, rather than commission — choosing an AMC that charges a fixed fee will keep you informed and prepared.
4. Are fund houses as reliable as banks?
There is a widespread notion that mutual funds are not as safe as bank accounts or schemes offered by banks. People fear that AMCs can shut down at any time. This is because banks are visible to all and regulated by the Reserve Bank of India (RBI). However, people often overlook the fact that mutual funds are also under the purview of RBI and the Finance Ministry, and hence quite safe.
The sponsor or the trustees appoint an AMC for managing the pool of funds. The AMC charges a fee and acts under the supervision of the trustees, who are, in turn, regulated by SEBI. The primary reason for this is to ensure objectivity and transparency. So, you can go ahead and invest your money in mutual funds to build long-term wealth while saving on taxes.
5. 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.
6. 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.
7. Where does the AMC stand in the overall mutual fund structure?
The Government of India and RBI formed the Unit Trust of India (UTI) in 1963 to regulate mutual fund industry. Later, when the government permitted public sector banks and institutions to set up mutual funds, the need for an impartial regulator arose. As a result, they passed the SEBI Act (1992) and made AMCs integral to the mutual fund structure.
To understand the functions of an AMC better, you must know where the AMC stands in the mutual fund structure. All the entities mentioned in the box work in tandem to create different mutual fund types catering to different investors.
|Sponsor||Forms a trust and appoints the board of trustees|
|Trustees||Regulate the mutual fund while adhering to SEBI and AMFI|
|Asset Management Company (AMC)||Takes a call on which fund to sell/buy/hold and engages in the buying and selling of securities|
|Custodian||Responsible for holding and safeguarding the mutual fund units|
|Registrar and Transfer Agents (RTA)||They are the record keepers|
In short, AMC’s position or rank in the AMFI is an essential factor for any investor. It sounds like too much work, right? This is why ClearTax offers you well-researched and handpicked portfolios from the top fund houses in India. Go for the one which suits your investment goals and risk profile to build wealth while saving on income taxes.