A Comprehensive Review of Asset Management Companies in India

Mutual funds have witnessed record-breaking inflows in recent years. These funds typically offer a viable and rewarding alternative to investors looking for higher returns than bank fixed deposits and government investment instruments. Whether you are a risk-taker or a risk-averse investor, there is always a mutual fund scheme to care for your needs.

Mutual fund schemes are managed by mutual fund houses, also known as AMCs or Asset Management Companies. There are over forty (40) registered asset management firms of varying sizes in India. AMFI data shows that the Indian mutual fund industry’s total Asset Under Management (AUM) has increased from INR 6.75 trillion in February 2012 to INR 37.56 trillion in February 2022, registering a stellar growth of over 500% in ten (10) years. Also, the total number of folios (investor accounts) stands at 126.1 million or 12.61 crores.

The following sections contain all information you need to understand asset management companies, their scope of work, types of funds, and other relevant information before investing in top mutual fund schemes.

What is an Asset Management Company?

An Asset Management Company (AMC) is a financial institution managing clients’ money. They collect funds through various channels, such as online (through net banking, credit/debit cards, UPI, etc.) and offline (through cheque and cash). While mutual fund brokers, such as 5paisa, offer online access to mutual fund schemes managed by AMCs, empanelled distributors provide offline access to such schemes. AMCs launch New Fund Offers or NFOs to collect money from investors.

Asset management companies are run by seasoned and trained investment managers with many years of experience in the financial industry. Mutual fund schemes managed by AMCs invest in a wide range of financial instruments, including equity stocks, corporate bonds, government securities, money market instruments, certificates of deposit, commercial papers, treasury bills, commodities like gold, silver, etc., index derivatives like futures and options, and even other mutual funds.

An AMC generally collects funds from four types of investors – retail individual investors, corporate houses, foreign institutional investors, and high net worth investors. In addition, some governmental organisations also invest in Indian mutual funds. Because an AMCs primary task is to collect funds from investors and invest them in high-return financial instruments, they are also referred to as money management firms or simply money managers.

Indian asset management companies offer two types of fund options – mutual funds and Exchange-Traded Funds (ETFs). Investors do not need a Demat and trading account to invest in mutual funds. However, Demat and trading accounts are mandatory for investing in ETFs. Besides mutual fund schemes, asset management firms also offer Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and Portfolio Management Services (PMS).

Indian asset management companies abide by the rules of the Securities and Exchange Board of India (SEBI). SEBI is the top authority in India overseeing capital market and mutual fund investments in the country. SEBI issues notices to mutual fund houses failing to fulfil the regulations laid by it. Investors can also lodge a complaint with SEBI if they feel that a mutual fund house does not address their concerns.

Mutual fund schemes offered by asset management companies are popular among investors primarily for two reasons:

  1. It allows investors to earn decent returns without actively participating in the capital market.
  2. Investors can conveniently enter into and exit from these funds (except for closed-ended funds).
  3. When investors want to invest in stocks, they have to deposit a minimum investment amount and open Demat and trading accounts.

In contrast, there is no need to create a special account since the money gets deducted automatically from the investor’s bank account. Similarly, the capital plus profits are transferred to the investor’s bank account whenever they want.

So, you know what an asset management company is. Let us now understand how an AMC gets the money to work efficiently.

Where Do Asset Management Companies Get The Money From to Work Efficiently?

Asset management firms charge a fee (Expense Ratio) from investors when they invest with AMCs. The fee is usually a fixed percentage of the investor’s total capital. Although the fee is calculated on a yearly basis, it is deducted from the investor’s account every month. So, if a scheme has an expense ratio of 1% and your total investment amount is INR 1 lakh, the AMC will deduct around INR 85 every month or INR 1,000 a year. However, the calculation is far from this simple. Since the fund value is dynamic and not static, the expense ratio is levied on the actual and not the average fund value.

The fund value is directly related to an AMC’s profitability. If an investor’s fund value increases, the AMC gets more money as the expense ratio. However, the AMC gets less money if the client’s fund value decreases. So, an AMC’s profitability is directly associated with investors’ prosperity. As a fact, the more prosperous the investors, the more profitable an AMC.

The expense ratio helps asset management firms hire the best mutual fund managers and pay staff salaries. The money also enables them to manage their establishment and stay operational. Some AMCs launch an IPO (Initial Public Offering) to get additional funds for business expansion or debt consolidation. Click on this link to read more about IPOs.

How Do Asset Management Companies Function?

The primary purpose of an asset management company is to manage and monitor mutual fund schemes. They also manage AIFs, PMS, REITs, and the like. An AMC needs the approval of SEBI and the Ministry of Finance before collecting funds from the public.

A mutual fund is established as a trust with trustee(s), sponsor(s), custodian(s), registrar(s), and the AMC. One or more sponsors set up the trust who act as the mutual fund’s promoter. When investors invest money in a mutual fund scheme, the funds are held by the trustees. The AMC oversees the fund management process by selecting top-class investment instruments and investing the pooled funds. According to SEBI regulations, at least two-thirds of the trustee company’s directors and 50% of the AMC’s directors must be independent and not directly associated with sponsors.

After investors pour money into a mutual fund scheme, the funds are managed by trained mutual fund managers. Generally, AMCs have the following four types of fund managers:

  • Equity Fund Managers – Equity fund managers analyse and evaluate the growth prospects of equity stocks. They invest in large-cap, mid-cap, and small-cap stocks as per a scheme’s investment objectives. Usually, equity fund managers keep between 10% and 15% of a fund’s total AUM in cash and cash-equivalent instruments to fulfil redemption requests.
  • Debt Fund Managers – Debt fund managers specialise in debt and fixed-income instruments like government securities, corporate bonds, debentures, certificates of deposit, commercial papers, and other money market instruments. Debt fund managers aspire to deliver stable returns sans many risks.
  • Commodities Fund Managers – Commodities fund managers evaluate the prices of commodities like gold and silver to identify investment opportunities. The funds managed by these managers provide a viable alternative to physical gold investments. Commodity-oriented mutual funds usually perform well when the equity market tumbles.
  • Passive Fund Managers – Passive fund managers oversee investments in securities that are a part of a benchmark index. These fund managers simply replicate the structure and composition of the benchmark index and do not apply their good judgement to increase (or decrease) the returns. Hence, if the benchmark index increases, the fund value grows and vice versa.

Which Factors Determine The Quality of an Asset Management Company?

As previously mentioned, there are over forty (40) mutual fund houses (read, AMCs) in India. However, not all asset management firms or schemes run by them are equally popular. So, what makes an AMC popular? The answer is contained in the following paragraphs:

The Allocation of Assets and Investment Style

Asset allocation is crucial since the returns from mutual fund schemes and the AMC’s profitability depends on it. Both investment instruments and timing are important parameters here. If the fund managers of an AMC identify the best financial instruments and understand the timing well, the funds managed by them can deliver outstanding returns. And, if investors get value from their investment, they will invest more and be the AMC’s loyal brand ambassadors. Hence, you must understand the fund manager’s investment objectives and fund management style before investing in mutual fund schemes.

The Review of Performance 

Asset management companies publish all information about the schemes they manage in a bulletin. Alternatively, you can visit portfolio management websites like 5paisa to evaluate the performance of mutual fund schemes managed by respective AMCs. To find the quality of an AMC, you can scan and evaluate the 1-year, 3-year, 5-year returns, and returns since the inception of these funds to predict the growth prospects. It is also wise to see the entry or exit load and the expense ratio of these funds to figure out the net investment cost.

Which are the SEBI-Laid Regulations Concerning Asset Management Companies in India?

Here are some regulations laid by SEBI for AMCs in India:

  • The AMC’s Chairperson cannot be a trustee in the trustee company of the mutual fund.
  • An AMC’s key personnel must not engage in offensive or fraudulent activities.
  • An AMC cannot be a trustee of the mutual fund.
  • An AMC’s net worth must not be below INR 10 crore.
  • AMCs must release scheme offer documents before accepting public money.
  • All AMCs must submit a quarterly report of funds and accounts to the concerned trustees.

Should You Invest in Mutual Funds Governed by Asset Management Companies in India?

All Indian asset management companies follow government guidelines for investing money in various capital and commodity market instruments. In addition, governmental agencies like SEBI, RBI, and the Ministry of Finance regularly monitor AMCs to ensure that people’s money is in safe hands. Read some free mutual fund blogs to enhance your knowledge and understanding of mutual funds before investing.

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