Asset Management Companies (AMCs)

What is an Asset Management Company (AMC)?

An AMC (Asset Management Company) is a financial institution that invests a pool of fund collected from different investors into assets such as equities, debt, ETFs, real estate, etc. These investors can be retail investors, companies, financial institutions, trusts, overseas investors, etc.
Professional investment managers manage the funds to attain the best possible return for investors. AMCs charge a fee as a percentage of assets (also known as expense ratio) to operate and manage investments on behalf of investors.

How do Asset Management Companies (AMCs) Operate?

AMCs hire professional managers who assess economic factors, industry trends, and fundamentals to design a portfolio to match the financial goals and risk appetite of investors using:

Market Analysis

Fund Managers study macro and microeconomic factors and events shaping financial markets. They also research investments and asset classes to arrive at a suitable portfolio to maximise return and alleviate risks.

Asset Allocation

Depending on the fund's investment objective, fund managers allocate investors' assets into different asset classes e.g. stocks, ETFs, bonds, and commodities.

Portfolio Building

Fund managers construct portfolios by selecting securities based on their research, fund objectives, and risk factors so that the investment is resilient even during market downturns.

Investment Review

Fund managers are accountable to investors for fund allocation and performance. They conduct reviews and periodic reporting to investors on buy/sell, strategy, risk taken, and performance.

Importance of Asset Management Companies (AMCs) in India

• AMCs are financial institutions under the regulators' purview and act as portfolio managers for investors.
• AMCs provide a platform to investors and carry out complex job investment research and management. 
• AMCs make it easier for individual as well as institutional investors to invest their money in best-suited assets and provide their expertise and experience in navigating all types of investments avenues that every investor may not be able to on their own with limited time and know-how. 
• AMCs manage funds efficiently, hedge risks and aim to beat benchmark returns.

How to Choose an AMC?

Before investing via any AMC, it is important to do due diligence on AMC credentials and track record. Consider the below points before selecting an AMC:

1. Asset Under Management: Size of an AMC indicates the number of investors and assets the AMC is handling. Larger the size, longer the experience and expertise.

2. Reputation: Look into AMC’s track record for consistency over a period of time and AMC’s reputation for best practices and performance in different market cycles.

3. Fund Manager’s Credentials: An experienced and credible fund manager is the key to an AMC’s performance over peers.

4. Performance: Investors should find out how various funds under AMC have performed compared to the benchmark.

5. AMC Fees & Charges: Fees charged by AMCs may vary across different schemes they offer. Therefore, it is crucial to compare the fees and expense ratios of different schemes of different AMCs to make an informed investment decision.

Governing Bodies for an AMC:

AMCs in India are governed and regulated by SEBI (Securities and Exchange Board of India) and AMFI (Association of Mutual Funds of India).
SEBI regulates India’s capital markets and issues guidelines for the operation, management, and compliance of AMCs. AMFI is a non-statutory body formed by AMCs to ensure best practices and educate investors to safeguard investor interests. SEBI and AMFI work under RBI’s purview. 

Compliance Guidelines for AMCs

AMCs must comply with certain guidelines laid by SEBI as follows:

• AMC should maintain a minimum net worth of Rs.100 crores.
• Directors of the AMC should have adequate professional experience in finance and financial services or related fields and not be found guilty of misconduct.
• The Chairman of the AMC should not be a trustee of any mutual fund.
• The AMC shall not invest in any of its schemes unless full disclosure of its intention to invest has been made in the offer.
• AMC is required to have an independent Board of Trustees i.e. two thirds of the trustees should be independent persons not associated with the sponsors in any way.
• The sponsor must have at least 40% stake in the AMC.

AMC Charges & Fees

AMCs charge a fee to the fund for offering professional fund management & services such as advisory fees, operations costs, legal & compliance charges, distribution costs, servicing fees, etc. 

These charges are calculated as per the cost structure approved by SEBI, known as TER (Total Expense Ratio). The TER is calculated on the total fund AUM in a given period and it varies as per AUM:

Equity Funds: The maximum TER ranges from 1.05% (AUM Rs. 50,000 Cr) to 2.25%(AUM up to Rs 500 Cr)

Debt Funds: The maximum TER ranges from 0.80% (AUM Rs. 50,000 Cr) to 2%(AUM up to Rs 500 Cr)

AMCs are allowed to charge an exit load of 1% in case of equity funds if units are redeemed within one year of purchase. Investors must read fund’s offer document to understand the terms of charges.

How AMCs compare to Banks

AMCs are under the purview of SEBI and RBI and are as reliable as banks. AMCs manage a pool of funds and invest in different assets via mutual funds. 

Mutual funds are capital market investments that do not offer guaranteed returns compared to bank FDs but AMC funds are managed by professional fund managers. 

Fund managers conduct research and analysis to build portfolios with their market expertise to bring in returns above benchmarks and hedge risk at the same time.