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AMCs are SEBI-registered firms that handle mutual fund assets. Let's first talk about how mutual funds operate in order to better grasp how an AMC functions.
AMCs are companies that combine funds from different investors to invest in a variety of assets. The money is invested by the AMC in a variety of securities, including stocks, bonds, government securities, and commodities, among others. The different securities are chosen with the fund's investing goal in mind.
This article will walk you through everything you need to know about AMCs.
What is an AMC? How is it Linked to Mutual Funds?
To understand this, we have to take a look at the organizational and legal structure of mutual funds in India. It is typically a 3-tier system involving three separate legal players - a sponsor, a trust with its trustees, and an asset management company (often abbreviated as AMC).
As per laws and regulations that govern this system in India, a mutual fund is floated by a sponsor or the initiator in the legal form of a public trust rather than a company. This pool of public money or trust is then managed separately by an AMC, who acts as the fund or asset manager on behalf of the investors (unitholders) by charging a remuneration for this professional service.
What Does an AMC do?
You must have seen how the expense ratio varies from fund to fund. A major part of the expense ratio comprises the fund's operational or administrative expenses that are deducted as a charge from the investors' total returns by the fund manager or the Asset Management Company. The AMC renders all sorts of professional asset management services to optimize the returns generated, taking into account the fund's objectives and investors' risk appetite. The various functions carried out by them are -
Allocating Funds into Asset Classes:
Whether an equity or debt-oriented fund, the money pooled in from unitholders is invested substantially in equity or debt instruments. A hybrid fund again would have a balanced mix of both. A part of the fund is also kept as a cash balance for liquidity reasons. All these fundamental decisions regarding the asset mix are taken by the able professionals managing the fund via the asset management company.
Market Research and Analysis:
Experts employed by asset management companies undertake intensive market research and thorough fundamental analysis to pick stocks, debentures, and other assets. They closely study the leading market indicators, company data, and micro as well as macroeconomic factors to prepare informative reports, which the fund managers then analyze to make final investment decisions.
Managing Holdings and Portfolio Churning:
Based on the research findings and reports generated by the team, the mutual fund managers create the best possible portfolio by deciding how many of the instruments are to be held, additionally bought, or sold. This requires the professional competence and experience of fund managers who continually assess to what extent the portfolio needs to be remixed from time to time.
Evaluate Performance and Communicate to Unitholders:
As an investor, you hold the units of a mutual fund primarily because you lack the financial expertise and resources to buy/sell stock debentures directly and want to rely on professional experts (the AMCs) to manage your money optimally while also diversifying risks.
Thus every AMC is accountable to its investors to report transparently on its holdings, the NAVs, the returns generated, changes in managing personnel, etc. The stock market regulator SEBI also imposes certain reporting liabilities on the fund houses to protect the investors' interests.
How are the AMCs Regulated?
In a true sense, the stakeholders to whom the fund management company is answerable are the board of trustees that head the trust or mutual fund. They are the representatives of the unitholders or investors. But besides them, the AMC is answerable to the apex security market regulator SEBI and has to abide by its compliances.
The Association of Mutual Funds in India (AMFI) is another independent statutory body in India that passively regulates the AMCs through its guidelines. Together these two bodies seek to protect the investors' interests and foster greater transparency and accountability. The RBI and the finance ministry also govern the actions of the asset management companies in India to some extent.
Factors to Keep in Mind while Choosing an AMC
As explained above, Asset Management Companies are thoroughly regulated by SEBI and other bodies making every AMC as safe as commercial banks. So irrespective of the AMC you choose as an investor, the money would definitely be in safe hands, saving the risk that any market instrument is inherently exposed to.
Even with more than 44 AMCs functioning in the country, you may get stumped as to where to put your valuable funds. The following are the parameters based on which you can zero in on an AMC and go forward with your suitable scheme -
- Number of Years of Operation and Overall Market Goodwill
Although a banal ingredient in any decision making, a long track record exhibiting investor confidence for years or decades is a telltale sign that the fund management company employs the best talents to generate consistent returns on your money.
- The Asset under Management or AUM
In general, a greater AUM indicates a larger market worth of the instruments that the AMC has invested in. It reflects investors' confidence in the fund house as a lot of money has been pooled in from myriad unitholders over a significant time. However, this should not be the sole reason to choose an AMC.
- Fund Managers' Profiles
The managers are the ultimate decision-makers, and you trust them to build your portfolio and manage your funds. Hence, a look into their records, history, qualifications, experience, and expertise help in understanding their credibility and investment styles.
- Past Returns and Trends
An AMC can manage several mutual fund schemes and plans, each having varying objectives and risk metrics. While past returns are not always reflected in the future performance of schemes, it still speaks at length about the ability of the investment house to generate profitable returns for unitholders.
- Assimilate Data and Numbers
The SEBI and AMFI websites host detailed information regarding all the AMCs verified by these statutory bodies. As a responsible and prudent investor, you should ideally weigh the pros and cons of any AMC that you consider trusting your funds with.
All in all, before investing in any mutual fund scheme managed by an AMC, greater focus should be given to the relevant parameters of the particular scheme itself. Evaluate whether the goals, magnitude of risk, industry, and asset focus of the MF scheme align with your needs as an investor. You can have confidence in the integrity of any AMC operating in the country as SEBI regulates each one of them by exercising strict vigil and governance.