Mutual funds market capital is valued at Rs. 37.75 Trillion as of June 2022 and has crossed 10 crore folios in May 2021. There are almost 40+ asset management company operating in India, with 2393 schemes managed.
Every AMC holds various schemes that are regulated and approved by SEBI. Total funds pooled under a plan are AUM (Asset under management).
AMC manages the fund of all individual investors and institutions under various schemes authorized by SEBI by a professional team.
So what is an Asset management company? What are their roles and working structure of them? How do they charge investors?
In this article, we will break down all the information about AMC in a mutual fund.
What is Asset Management Company?
Asset Management Company or AMC is an investment firm that pools funds from individual or institutional investors and invests in various mutual fund schemes.
These companies have a professional research team, including a fund manager, to manage a mutual fund to achieve the investment objective against the benchmark.
Asset Management Company is the full form of AMC in mutual fund. The company invests in various high and low-risk securities like equity, debt, fixed income instruments, real estate, pension funds, etc.
AMC and fund management team is responsible for portfolio diversification, management, and asset allocation.
They are also entitled to calculate the risk profile of the total asset they manage. The risk should contain an overall assessment of factors like,
- Market risk
- Industry Risk
- Specific Company Risk
- Political risk
- Return risk
I hope a lot of management protocol is followed in an AMC; thus, they charge investors a management fee on every investment as an expense ratio.
Role of AMC in Mutual Fund:
AMC works on various roles to make any fund achieve its objective. Every scheme operated by different AMC in India has a benchmark, aiming to outperform the benchmark performance with fewer risk ratios.
In accordance to achieve them, Asset management companies invest in various processes as follows,
- Market Research
- Asset Allocation
- Creating and Managing the Portfolio
- Performance Review.
- Updating Fund Information in the portal.
Market Research:
Mutual funds have attracted many investors compared to the stock market because of a lack of confidence in market research and analysis.
Many investors don’t get time to set up a research process of companies like analyzing the annual report, balance sheet, cash flow quadrants, etc.
Think of investing time in research for 100+ stocks, as diversification can reduce the risk. Hurray, I could read your mind voice!
That’s why you need a professional team who invest their time in analyzing the opportunity in the market and invest the pooled fund in the securities as per their market research.
Asset Allocation:
One of the important roles an Asset management company does is asset allocation. Yes, they have to follow the regulations of SEBI to set up allocation of various themes of schemes.
For example, a Large Cap Fund should invest more than 70% of the assets in large-cap companies.
So, based on the market research and analysis, the fund manager plan to allocate the assets.
Creating and Managing the Portfolio:
The next step an AMC should process is creating a strong portfolio that is diversified to outperform the benchmark.
A fund manager takes sole responsibility along with their team to segment the total fund on various stocks.
The fund manager and the team should always keep an eye on the portfolio they manage. The team makes a great effort to control the percentage of stocks in the overall portfolio.
Also, help the fund add new stocks, remove non-performing stocks, or hold the stocks performing as expected.
Performance Review:
The most important role of the asset management company is to review the performance of all the mutual funds managed.
A portfolio’s performance measurement is of utmost importance since an investor’s fund is at stake. Investors and trustees must be justified whenever an asset manager buys, sells, or holds securities.
The fund house should update the funds’ NAV and XIRR (returns) at the end of the trading day.
Also, the fund manager and AMC should telecast the risk profile details and investment diversification to the investors upfront.
How to Choose an Asset Management Company?
One important question that comes to every investor’s mind is how to select the AMC company to pool the funds for greater returns. The answers are so simple.
- Validate the Reputation of the AMC – You should always look at the reputation of AMC, such as the number of schemes they have, years in the industry, amount of total AUM they manage, and regulatory actions taken by SEBI or other regulators.
- Research Fund Managers History and Credibility – Fund managers are responsible for a fund’s positive or negative growth. So, the credibility of the fund manager is vital before choosing an AMC. Check the performance history of the fund manager and if there are any allegations by SEBI against them.
- AUM (Asset Under Management) – When an AMC has a high AUM, it’s a sign that most investors choose them. Preferably stay with Asset management companies with high AUM.
- Average Returns an AMC Yields – Before choosing a fund from any AMC, understand the average returns from all the funds they manage. Post this to compare the returns with other top AMC.
- Expense Ratio – Fees and Commission called TER (total expense ratio) has a huge role and can impact a fund’s performance.
- Entry and Exit Loads – Entry load is normally nil in modern mutual funds available, yet, few funds charge exit loads.
This is not the process of selecting the mutual fund; it’s just picking the right AMC. If you want to know how to choose mutual funds, click on the link.
SEBI, AMFI, and RBI Guidelines for AMC:
Asset Management companies are regulated by SEBI (Securities Exchange Board of India), AMFI (Association of Mutual Funds India), and RBI (Reserve Bank of India). Here are a few guidelines an AMC should follow,
- The chairman of AMC should not be the trustee of any mutual funds.
- None of the key members of AMC shouldn’t be convicted of fraud or guilty.
- AMC should not act as a Trustee of the mutual fund.
- An AMC should have a net worth of more than Rs. 10 crores.
- The company should disclose a document with the objective of investment for the planned launch scheme.
- AMC must submit a quarterly report on activities and compliance with regulations to the trustee.
Conclusion:
- Asset Management Company pools investor’s funds and manages them, investing in various securities by schemes.
- SEBI, AMFI, and RBI regulate these AMC.
- AMC works on market research, asset allocation, portfolio management, and performance review of mutual funds.
- The company employs a fund manager and a team of research analysts to manage the fund performance and lay an expense ratio for investors.