How do an Asset Management Company functions?
An AMC collects funds from different investors having different financial objectives. Now it invests such a large pool of funds in a very diversified portfolio and enjoys economies of scale, getting discounts on purchases. The return earned by the portfolio is then distributed among all the small retail investors.
The services provided by an AMC is charged either on a fixed basis or commission-based. Fixed Fee is nothing but a monthly or quarterly amount for maintaining the fund.
Points to consider before you choose an AMC:
Every AMC follows the investment objective of the schemes before investing and you must check on the track record and performance history of the investment schemes in the past during the ups and downs of the market. It is very important to know your AMC well before you invest your hard-earned money.
While selecting a fund house ensure that the below parameters met.
- The reputation of an AMC - Reputation is built by consistency in performance over a few years say 5 years or 10 years. The investor must go through the performance through annual reports of schemes and AMC, reviews prevalent in the market and compliance report to SEBI, AMFI, and RBI.
- Fund Manager’s credibility - AMC work in parallel to its fund manager. The performance of the fund manager is now the performance of AMC then. Hence, an investor must look for past performance of the fund manager w.r.t managing the assets and funds.
- Price and Value - Before selecting any fund, an investor must consider looking at the price of the fund and the value creation and return that the fund offer.
- Fees and commission - Few AMCs charges a fixed fee for their services while others charge a commission on the return earned on the fund. A fixed is considered over commission because an investor will always know the outflow amount beforehand.
Bodies Governing AMC’s Operations
AMC performs under the supervision of the board of trustees. All the Asset Management Companies are governed by SEBI and AMFI.
Securities and Exchange Board of India (SEBI) is the Indian Capital Market Regulator which governs and controls every AMC in India.
The Association of Mutual Funds in India (AMFI) is a statutory body formed by mutual fund companies. AMFI was formed with the vision of a transparent and ethic driven financial industry. Every AMC must comply with the regulations led by AMFI.
Banks being sponsors are governed by RBI as well along with SEBI and AMFI.
Lastly, all the regulatory bodies SEBI, AMFI, and RBI are governed by RBI.
Guidelines laid by SEBI, AMFI, and RBI for an AMC
Some of the mandatory practices and guidelines laid down by SEBI, AMFI, and RBI for a mutual fund company to follow:
- The Chairman of an AMC cannot hold the position of Trustee of any mutual fund.
- Key personnel of every AMC should not have indulged or convicted for any fraudulent or offensive acts.
- AMC should not act as a Trustee of a mutual fund.
- The net worth of an AMC must be not less than Rs. 10 crores.
- Before making an investment in any of its schemes the company must disclose its intention to invest in the offer documents.
- A quarterly report on activities and compliance of regulations must be submitted to the trustees.
Reliability of AMC compared to Banks
We often have the notion that mutual fund companies are not as reliable as Banks and the schemes offered by AMC is not as secure as a Fixed Deposit Interest. The fact is every mutual fund company or AMC is governed by RBI and Ministry of Finance just like any Bank. Hence, it is safe to invest with a mutual fund company or AMC.
An AMC is appointed by the sponsor and trustee to manage the pool of funds. AMC acts under the supervision of trustees who are governed by SEBI and AMFI. This ensures transparency, accountability, and objectivity. Hence one must go ahead and invest to optimize their wealth and save their taxes.