Asset Management Companies

As the name suggests, an Asset Management Company (AMC) is a company that manages assets. It's a firm where investors invest the money, the pooled money is invested in different asset classes or financial markets. They manage the client's investments and make sure that their financial objectives are met.

HOW DOES IT WORK?

There are asset managers to help the clients in that. They closely observe the market, identify the opportunities and give advice. You might think that it sounds similar to mutual funds. Yes, they do but they are not similar but interrelated.

Mutual funds are an organization that pools the money and invests in assets. Those who do this are called Trustees. These people lack expertise and don't know where to invest. They hire professionals called Fund managers. These fund managers work in a firm referred to as an Asset Management company.

(Source: StockAxis)

These fund managers invest and operate the capital on behalf of the investors. The pooled fund is then invested in both high-risk and low-risk securities that include stock, debt, shares, bonds, and pension funds. They diversify and invest the money after analyzing the market generating more returns. In return for the profits they make they are paid ' asset management fees'. So basically what AMC does is manage mutual funds. It looks into the operations of mutual funds and their performance that decides the brand name of an AMC.

These professional people who understand money and how markets work, invest it in the stock market and fixed income investment. What they do is they invest not just a single but several industries. So if one stock doesn't perform well, you can manage and balance the dip with the other performing stock. This lightens the risk involved.

BUSINESS MODEL

AMC has a lean strategy business, it's low on cost and a highly regulated business. We will take the example of HDFC AMC which is the largest and top AMC in India has 221 branches but has only 1000 employees in total, unlike banks where there are almost 40,000 employees. This makes it low on cost.

WHO CONTROLS AMC'S?

The AMC is controlled by or works within the framework of the Securities and Exchange Board of India (SEBI). It is a body that regulates capital markets and protects the interest of the investors. The other features are the checker and maker or 'the dual approval' where there will be two individuals present or a second pair of the eye while completing the transaction. So it's relatively safer and nothing to worry about while investing. There is a presence of a registrar and a custodian too for the protection of customer interest and to safeguard from risks. Therefore we can say that it's a highly regulated business.

ORGANISATION STRUCTURE

Like every organization, it has top management, a CEO, or a CFO. Then there are fund managers, the one who manages equity and the other one who manages debt. Both have separate managers as it requires separate skills.

Then comes the analysts, they analyze the market and report to the fund manager.

They work according to and to fulfil the financial objective of their clients.

The other roles within an asset management company include:

• Distribution / salespeople

This is the usual sales and marketing division. They build relationships and bring in clients and capital, that is; new investments. This comprises people and relationship managers.

• Investment / product

This division encompasses portfolio managers, traders, research analysts. They come with suggestions on where to invest and how much to invest. The salespeople bring in the business and that money is invested by this team in financial markets. They spent their time researching, analyzing, and specializing in asset classes. They aim at making more returns.

• Support

This is the back office team such as compliance, human resource, finance. They support the salespeople and investment team to work best to their ability.

WHO ARE THE CLIENTS?

The client of an asset management company includes large institutions that have a lot of money; pension funds, insurance companies, governments, local authorities, and sovereign wealth funds, and other individuals.

When taking the case of pension funds, big companies have their pension schemes where a percentage of their salaries is put into pension funds. This money is invested in financial markets and grows by the time they retire.

Insurance companies are companies that deal with phone or care insurance, to invest the insurance amount they collect.

This, in turn, grows into a huge amount and can return the amount when the clients are in need.

Sovereign Wealth Fund ( SWF ) is a national government-owned investment fund.

SOURCE OF INCOME

The primary source of revenue for any AMC is the asset management fees the fund managers are paid. This is a small part taken from the investors capital that is usually 1-3% depending on the type of fund they manage. This is paid as a charge for the services they provide, for managing your money and maximizing the returns.

They work to their potential to make maximum returns and meet the financial objectives of their clients. Unlike sales and trading, in asset management, you invest for a long term a year or two, or even more. There is nothing to worry about as your money is in professional and responsible hands.

The only thing to be kept in mind is to do background research on the credibility, years of experience in fund management, size of the team, number of analysts and assets it manages, and the fee structure of the AMC before investing. This is important as how much you earn and lose depends on the ability and inability of the fund managers and his team.

"Asset management acquisitions are safer, in our view, given the predictability of earnings, although they will likely be more expensive than banks or consumer finance companies".

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Author - Tess Bobby

Content Writer at Escribo.