Asset Management Companies play a pivotal role in the financial landscape by managing investment portfolios on behalf of clients. Among these entities, AMC stands out as a key player.
In this article, we will delve into the workings of AMC, exploring its functions, revenue streams, and shedding light on the mechanisms that drive its financial success.
Asset Management Company, is an entity entrusted with the responsibility of overseeing and growing the investments of individuals, institutions, and other clients. These companies provide a range of financial products and services, including mutual funds, exchange-traded funds (ETFs), and discretionary portfolio management.
Various factors, including industry risk, market risk, return risk, and political risk, are thoroughly assessed when selecting a security to align with the desired return on investment targets, especially in the context of an Asset Management Company. For instance, when opting for a debt fund managed by an AMC, the focus is on investing in bonds and risk-free government bonds to minimize overall risk. Conversely, in the case of an equity-oriented fund managed by the same AMC, the strategy involves investing in shares and stocks, acknowledging the inherent higher risk in pursuit of potentially higher returns. The role of an AMC is pivotal in strategizing and managing diverse portfolios that cater to varying risk appetites and investment goals.
Management Fees: The primary source of revenue for Asset Management Companies is the collection of management fees. These fees are calculated as a percentage of the assets under management (AUM). Clients pay this fee for the professional management of their investment portfolios.
Performance Fees: In addition to management fees, some Asset Management Companies may charge performance fees based on the investment performance. If the fund outperforms a predefined benchmark, the AMC may receive a percentage of the excess returns as a performance fee.
Distribution Fees (Loads): AMCs may charge fees related to the distribution of mutual funds. These can include front-end loads (charged at the time of investment) or back-end loads (charged at the time of redemption).
Advisory Fees: For providing investment advice and financial planning services, They may charge advisory fees. This can be separate from the fees associated with managing specific investment products.
Custodian Fees: Some of them act as custodians for their clients’ assets, holding and safeguarding the securities. Custodian fees contribute to the overall revenue for the AMC.
Portfolio Management Services: Portfolio Management Services (PMS) represent a tailored offering by Asset Management Companies catering to high-net-worth investors, akin to a personalized mutual fund. This exclusive service is designed to meet the customized investment strategy, unique financial objectives and expectations of individual investors.
Key Features:
Personalized Approach: PMS functions as a personal mutual fund, allowing for a customized investment strategy that aligns with the specific needs of the investor.
Intensive Research: Successful portfolio management requires in-depth research to identify lucrative investment opportunities. They engage in thorough market analysis and research to make informed investment decisions on behalf of their clients.
High Risk and Reward: Due to the tailored nature of portfolio management and the pursuit of meeting high expectations, AMCs often undertake higher-risk investments with the potential for commensurate rewards.
Costs Associated with PMS:
Given the comprehensive research and elevated risk involved in portfolio management, It typically charge a higher fee for these services. This fee structure reflects the specialized and individualized nature of the investment strategy, aiming to deliver superior returns while addressing the specific financial objectives of the investor.
Types of Funds under AMCs
Asset Management Companies come in various types to cater to the diverse needs of investors. Here are some categories of these financial entities:
- Mutual funds
- Index Funds
- Hedge funds
- Exchange-Traded Funds (ETFs)
- Private equity funds
- Pension funds
- Insurance company
- Real estate
- Alternative investment
Regulation of AMCs:
Who oversees the operations of AMCs?
An Asset Management Company is regulated by the capital market regulator, the Securities and Exchange Board of India (SEBI). Additionally, AMCs are subject to passive regulation by the Association of Mutual Fund of India (AMFI), aiming to safeguard the interests of investors.
This dual regulatory framework ensures that AMCs adhere to guidelines set by SEBI and work in the best interests of investors under the oversight of AMFI.
Understanding Expense Ratio with Example:
Example: ABC Small-cap mutual fund’s expense ratio is 0.5%.
This means, 0.5% of the amount you invested will be the AMC’s fee (per annum).
And this 0.5% per annum is charged every day (0.5% divided by 365 = 0.0014%).
So in this case, 0.0014% out of the latest value of your investment is taken as the expense ratio every day.
Most Important to note, that the expense ratio is charged to the investment’s latest value – Not the original investment value.
Every mutual fund’s expense ratio is different.
This sheds light on how AMCs, including mutual fund companies, earn money. It’s a dynamic landscape where various fees contribute to their revenue, and the success of these companies depends on their ability to navigate challenges and seize opportunities in the ever-changing financial markets.
FAQs
Q1: Are management fees the only source of revenue for AMCs?
A1: No, AMCs can generate revenue through various channels, including performance fees, distribution fees, advisory fees, and custodian fees.
Q2: How are management fees calculated?
A2: Management fees are typically calculated as a percentage of the total assets under management (AUM). The percentage can vary based on the type of investment product and the services provided. Also make a note that the expense ratio is charged to the investment’s latest value – Not the original investment value.
Q3: What is a load in mutual funds?
A3: A load is a sales charge applied to mutual fund transactions. Front-end loads are charged at the time of investment, while back-end loads are charged at the time of redemption.
Q4: Do AMCs face challenges in the financial industry?
A4: Yes, AMCs face challenges such as market volatility, regulatory changes, and the need to adapt to evolving investor preferences. However, they also have opportunities for growth through technological advancements and product innovation.
Q5: What is industry risk in the context of security selection?
A5: Industry risk refers to the potential challenges and uncertainties specific to a particular industry. Before selecting securities, investors assess industry risk to understand the potential impact on their investment returns.
Q6: Why do AMCs charge a higher fee for Portfolio Management Services?
A6: The specialized nature of portfolio management, involving intensive research and higher risk, justifies the higher fees charged by AMCs. This fee structure reflects the individualized approach and commitment to meeting the elevated expectations of high-net-worth investors.
List of Asset Management Companies (AMCs) in India
A. Bank Sponsored
1. Joint Ventures – Predominantly Indian
• Baroda BNP Paribas Asset Management India Private Limited
• Canara Robeco Asset Management Company Limited
• SBI Funds Management Limited
• Union Asset Management Company Private Limited
2. Others
• Bank of India Investment Managers Private Limited
• UTI Asset Mgmt. Co. Ltd.
B. Institutions
1. Indian
• IIFCL Asset Management Co. Ltd.
• LIC Mutual Fund Asset Management Limited
C. Private Sector
1. Indian
• 360 ONE Asset Management Limited (Formerly known as IIFL Asset Management Limited)
• Bajaj Finserv Asset Management Limited
• Bandhan AMC Limited
• DSP Asset Managers Private Limited
• Edelweiss Asset Management Limited
• Groww Asset Management Limited
• IL&FS Infra Asset Management Limited
• ITI Asset Management Limited
• JM Financial Asset Management Limited
• Kotak Mahindra Asset Management Company Limited.
• Motilal Oswal Asset Management Company Limited
• Navi AMC Limited
• NJ Asset Management Private Limited
• Old Bridge Asset Management Pvt. Ltd.
• PPFAS Asset Management Pvt. Ltd.
• quant Money Managers Limited
• Quantum Asset Management Company Private Limited
• Samco Asset Management Private Limited
• Shriram Asset Management Co. Ltd.
• Sundaram Asset Management Company Ltd
• Tata Asset Management Limited
• Taurus Asset Management Company Limited
• Trust Asset Management Private Limited
• WhiteOak Capital Asset Management Limited
• Zerodha Asset Management Private Limited
2. Foreign
• Franklin Templeton Asset Management (India) Private Limited
• Helios Capital Asset Management (India) Pvt. Ltd.
• HSBC Asset Management (India) Private Ltd.
• Invesco Asset Management (India) Private Limited
• Mirae Asset Investment Managers (India) Pvt. Ltd
• Nippon Life India Asset Management Limited
• PGIM India Asset Management Private Limited
3. Joint Ventures – Predominantly Indian
• Aditya Birla Sun Life AMC Limited
• Axis Asset Management Co. Ltd.
• HDFC Asset Management Company Limited
• CICI Prudential Asset Management Company Limited
• Mahindra Manulife Investment Management Pvt Ltd
Source – Amfiindia
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