1. What is an Asset Management Company?
Simply put, an Asset Management Company manages money collected from diverse investors. A fund house decides when, where and how to invest this money. Its decisions will be in line with their declared investment goals. So, they choose to invest in asset classes like equities, stocks, shares, bonds, securities and cash equivalents accordingly.
The fund manager first evaluates various metrics like market risks, industry risks etc. and then makes a decision that can meet their investment goals. For instance, a debt fund invests mostly in bonds and government securities to keep the risks minimal. But an equity fund mostly focuses on equities (shares) of companies. The ultimate aim here is to make lucrative investment decisions that will give investors maximum returns.
2. How does an AMC manage the funds?
When you invest with an AMC, you are purchasing a portfolio they offer. The company is principally responsible for driving the mutual fund and make decisions that benefit the investors. Under the leadership of an asset 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
Every mutual fund comes with a definite financial objective or a theme– this helps the asset manager to shortlist and decide on which asset to invest in. For instance, many debt-oriented funds put no more than 20% of their assets under management in equities. Or a balanced fund may choose to invest only 60% assets in equities. This is asset allocation – one of the crucial decisions a fund manager has to take on a daily basis.
b. Research and Analysis
Building a portfolio rides on plenty of in-depth study on a daily basis. Analysts study the market, micro and macro-economic aspects and fund performances regularly, and pass the reports to the manager. He makes decisions that can help the company beat the benchmark and rise above its peers (apple to apple comparison). Then the fund manager takes the final call on stock selection, which decides the fate of the fund.
c. Portfolio Construction
An AMC will have a slew of researchers and analysts who report their market findings and trends to the fund manager. Based on these findings and investment objectives, he chooses which securities to buy, sell or whether to hold them. This is how a company builds a portfolio, which depends predominantly on the experience and expertise of the manager.
d. Performance Review
Even with disclaimers in the fine print, an AMC faces a lot of flak from the investors and trustees, if it cannot justify its investment decisions. For instance, the company must provide unit- holders with information that have a direct impact on their holdings. It must also send regular updates on sales and repurchases, NAV, portfolio details etc. to investors.
3. On what basis should an investor choose an AMC?
While an AMC follows the investment objective of every scheme before investing, you still need to check its vintage and track record. So, understand everything about the team you are trusting your hard-earned money with. Market savvy investors can also look at the performance history of various schemes managed by the company during market ups and downs.
The points given below can be the main parameters for you to select a fund house.
Assess price & value: It is normal to get hooked on the price before buying something. Of course, we are not telling you to get rid of that habit. Before selecting an AMC, pay attention to its value. For instance, if you are earning less from a fund, then it makes little sense buy a fund, however cheaper it is.
The reputation of the AMC: A fund company does not earn its reputation in a day. Example, a company only earns a reputation after giving a consistently good performance for say, 5 or 10 years. Go through 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, no fund company will hire a manager with a less-than-impeccable expertise for fear of losing their customers. 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. This means, you will have some idea how your expense ratio will turn out to be.
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 get shut down any time. This is because banks are visible to all and regulated by RBI. However, people often overlook the fact that mutual fund companies too are under the purview of RBI and 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 Asset Management Firm acts under the supervision of the board of trustees. But they are answerable to India’s capital market regulator, 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 themselves formed the AMFI. Together, they strive to keep the functioning of the industry ethic-driven and transparent. RBI also plays an important 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
Below are some of the practices and guidelines for mutual fund companies that SBI, 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 of each year 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 offense)
e. The Chairman of AMC should not be a trustee of any mutual fund
f. The AMC should have a net worth of not 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 in India. Later when the Govt 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 important 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 one that suits your investment goal and risk profile to build wealth while saving on income taxes.