What is an Asset Management Company
What is an AMC - Full Form (Asset Management Company)
In the finance world, an Asset Management Company is a Securities and Exchange Board of India (SEBI) registered intermediary that is allowed to accept money from different investors and then allocates that to mutual fund products across different asset classes such as equity, debt and commodities to generate returns for investors in accordance with the guidelines provided by SEBI under SEBI (Mutual Funds) Regulations, 1996 (“SEBI MF Regulations”).
How does an AMC operate?
[1] With more than 40 mutual fund companies in India, there are certain conditions to be met to set up an AMC and these conditions are laid down by SEBI which is the regulatory body for all the AMCs in India. SEBI holds the rights to grant the AMC license to a corporate body.
There are various stakeholders involved in a multi-tier structure to ensure transparency and accountability for all the operations carried out.
- Sponsor: Sponsor means any person who either individually or with any other body corporate establishes the Mutual Fund. The sponsor should have a sound track record and general reputation of fairness and integrity in all their respective business transactions as per SEBI MFRegulations. When the sponsor approaches SEBI for a Mutual Fund license, there is a highly stringent license approval process.
- Trustees: “Trustees” as defined in the MF Regulations as the Trustee Company that holds the property of the Mutual Fund in trust for the benefit of the unit holders. This means that they are responsible for protecting the interest of the mutual fund unit holders and also make sure that the Asset management Company (AMC) functions with the right principles and ethics and is compliant with all regulatory guidelines at all points and times.
- Asset management Company (AMC): The AMC is responsible for the operation and management of different mutual fund schemes, in compliance with the SEBI MF Regulations and guidelines issued by SEBI from time to time. The AMC is responsible for the design of these schemes as per the SEBI MF regulations and floating it out in the market. It also has a legal and compliance team, fund management team that also includes investment officers and analysts that help in the effective functioning of day-day operations.
- Custodian: It is generally a financial institution registered with SEBI that holds the securities bought by the mutual fund.
- RTA: The ‘Registrar and Transfer Agent’ is appointed by the AMC. They process investment applications and maintain the record of investor’s transactions such as buying and selling of Mutual Fund units, updating personal information etc.
Functions of an AMC:
There are numerous operational roles an AMC takes up but some of their primary responsibilities are:
- Research and Analysis: Before an AMC decides which mutual fund product to offer, there is a thorough analysis conducted on which type of fund would make more sense for the investors. They also try to understand the associated risks considering the landscape of the capital markets.
- Professional fund management: AMCs employ fund managers who use their professional experience in managing investments. They allocate investor money to the respective financial instruments based on the investment objective of the scheme(s).
- Clarity and Transparency: AMCs are accountable to disclose the portfolio composition, performance details, Assets Under Management (AUM), expense ratios etc periodically. This helps both the existing investors and the potential investors to understand if investing in the scheme is aligned with their financial goals or not and helps them make an informed decision.
How are funds managed by an AMC?
Fund Management involves activities including but not limited to performing capital allocation and honouring investor redemption requests. AMCs offer mutual funds that are tailored to different investment objectives and risk profiles as defined in the SEBI MF Regulations. Once the AMC receives money from the investors under a particular fund, the funds manager allocates money to the respective constituents of the fund in accordance with the defined investment objective.
In case the AMC receives redemption requests for these funds then the AMC will process the transaction and the redeemed amount is then credited to the investor's registered bank account, after deduction of the applicable charges and stamp duty within the time limits as defined in the SEBI MF Regulations.
Category of Mutual Funds offered by AMCs based on management of portfolio:
Active Funds and Passive Funds: In case of Active mutual funds, the fund management team actively picks the right securities to invest in with the goal to beat the market benchmark that the fund is tracking. In case of Passive mutual funds, the objective of the scheme is to just replicate the performance of the underlying index. A few examples include: Index Funds and ETFs. Most of the AMCs offer both active and passive schemes to investors.
An AMC that offers only passive schemes may be referred to as a passive-only AMC. The funds offered are generally lower in cost to the investors compared to active schemes as the maximum regulatory limit to charge the Total Expense Ratio (TER) for passive funds is lower than active funds.
[2] SEBI Guidelines on constitution and management of an Asset Management Company and Custodian:
SEBI is responsible for protecting the interests of investors in securities and to promote the development of, and to regulate the securities market. The SEBI is also responsible for registering and regulating the working of mutual funds. Below are few of the steps laid down by SEBI for the AMCs:
- Application by an asset management company
- Appointment of an asset management company
- Eligibility criteria for appointment of asset management company
- Terms and conditions to be complied by the asset management company
- Restrictions on business activities of the asset management company
- Asset management company and its obligations
- Appointment and Agreement of Custodian
[3] Asset Management Company (AMC) and Association of Mutual Funds in India (AMFI):
Association of Mutual Funds in India (AMFI) is a non-profit industry body of the asset management companies (AMCs) of all Mutual Funds in India that are registered with Securities and Exchange Board of India (SEBI).
AMFI functions under the broad guidance of the AMFI Board, comprising fifteen Directors, elected from various categories of AMCs and operates on a co-operative model with the help of various standing committees and working groups. Since the time it was established, AMFI has evolved as a highly respected representative body of the MF industry, owing to active involvement of its members. One of the primary roles of AMFI is to introduce best practices and standardised operational guidelines for being uniformly followed by all AMCs.
Conclusion
From an investor’s point of view it is important to understand the basic structure of an Asset management Company (AMC), how they function, the respective regulatory frameworks governing them. Any investment that happens in a mutual fund is managed by an AMC. Hence, it is important for an investor to understand the operations of an AMC.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully
Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.
Source:
[1]:Asset management Companies (AMC)
[2]:Constitution and management of Asset Management Company (AMC)
[3]:About AMFI
