Asset Management Company ( AMC )

Having a financial expert to manage your money is always a good idea; especially if you’re not aware of how the stock markets work. This is when a mutual fund house or an Asset Management Company (AMC) comes into the picture.

What is an Asset Management Company?

Asset management companies (AMCs) are firms pooling funds from various individual and institutional investors and investing in various securities. The company invests the funds in capital assets such as stocks, real estate, bonds, and so on. The asset management companies have professionals called fund managers who manage the investment and the research team selects the right securities. 

Fund managers identify the investment options that are in line with the objectives of the fund. For instance, a debt fund invests mostly in bonds and government securities to protect the investment and earn a steady return. An equity fund mainly focuses on investing in shares of companies to maximise return for the investors.

How does an AMC manage the funds?

You may invest in mutual funds directly with an AMC or asset management company. 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 investment objectives of the scheme. The process is broadly listed below.

Asset Allocation

Mutual Funds have a particular investment objective, which helps the fund manager  decide on the assets in which the investments can be made. For example, most debt-oriented funds have a sizable proportion of their assets under management in bonds and other fixed-income securities. Another example is that most balanced funds invest in a mix of stocks and fixed income securities. 

Research and Analysis

Building the fund’s portfolio rides a lot on research and analysing the performance of the asset classes. Experts study the market, micro and macro-economic aspects and pass on the reports to the fund manager, who then makes investment decisions based on the funds objectives. 

Portfolio Construction

An AMC typically has a team of researchers and analysts who report their market findings and trends to the fund manager. Based on these findings and investment objectives of the fund, 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 fund manager.

Performance Review

AMCs must provide unitholders with information that has a direct impact on their mutual fund holdings. It must also send regular updates on sales and repurchases, NAV, portfolio details, and so on to investors. In simple terms, AMCs must answer to the investors of the mutual funds and look after their interests. Moreover, they must attend to customer grievances regarding their mutual fund schemes. 

On what basis should an investor choose an AMC?

You must check the track record of the AMC and also the assets under management (AUM) before choosing an AMC. It helps if you choose an AMC with large assets under management that can handle the sudden redemption pressure of large investors. Market savvy investors can also check the performance history of various mutual fund schemes managed by the AMC during both market ups and downs to get an idea of performance across market cycles.

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 to do so. For example, an AMC gets a good reputation after performing consistently over 5 or 10 years. 

Check the reviews: You must talk to other investors, and check if the past performance has been consistent and if there are any grievances against the AMC. 

Fund manager’s credentials: You must check the track record of the fund manager and the investment style. There are many mutual fund schemes whose performance is dictated by the investment style and skill of the fund manager. You must never invest in a mutual fund if you are not comfortable with the investment style of the fund manager. Moreover, mutual funds display the style box to help you gauge the investment style of the fund manager.

Are fund houses as reliable as banks?

There is a widespread notion that mutual funds are not as safe as bank accounts or investment schemes offered by banks. People fear that AMCs can shut down at any time or run away with their money. This is because banks are regulated by the Reserve Bank of India (RBI and people . However, people often overlook the fact that mutual funds are regulated by SEBI, the capital market regulator and AMFI looks after investor education and their interests.

The sponsor creates or sets up an AMC under the Companies Act, 1956. 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 with the operations of the AMC. You may invest in expert-curated mutual fund plans consisting of top-performing mutual funds by downloading the BLACK by ClearTax app. 

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 and looks after their interests. Every mutual 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 ethics-driven and transparent. RBI also plays an essential role in regulating AMCs, and mutual funds need approval if they are launching guaranteed schemes. 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, AMFI, and RBI mandate: 

• An AMC shall not serve as the trustee of any mutual fund.
• 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.
• They shall submit quarterly reports on its activities and the compliance with these regulations to the trustees.
• Key personnel of an AMC should have a clean record (not convicted of any economic offence such as fraud or insider trading).
• The Chairman of the AMC shall not be a trustee of any mutual fund.
• The AMC should have a net worth of  less than Rs 10 crores.
• SEBI has guidelines for the reports that must be submitted by AMCs to the trustees. AMCs must submit the compliance certificate to the trustees on a bi-monthly basis.

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. 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 in India. 

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 sets of investors. 

Sponsor	Forms a trust and appoints the board of trustees
Trustees	Regulates the mutual fund while adhering to SEBI and AMFI norms
Asset Management Company (AMC)	Takes a call on which securities to sell/buy/hold and manages the investments of unit holders
Custodian	Responsible for holding and safeguarding the mutual fund units
Registrar and Transfer Agents (RTA)	They are the record keepers

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