An asset management company or AMC is a financial enterprise that specializes in collecting money from a large number of clients and investing the pooled money in various assets. The investment assets can be of various types. Examples include equities, debt securities, commodities, mortgage collaterals, and many more. Different assets align with different investment goals and risk tolerance levels of clients.
Of course, people who make investment decisions all by themselves, and handle their own cash flow don’t opt for AMCs. However, they make up a very small percentage of investors.
Financial Awareness and AMCs
The increase of financial literacy among the masses is making AMCs more relevant than ever before. In the past, people lacked financial awareness, and so, they were either cavalier with their money or used it irresponsibly. But the emergence of AMCs has been changing this scenario. Earlier, AMCs used to operate with pension funds, cooperative funds, etc. Their retail clientele were mostly high net-worth individuals with disposable income. But now, people from median-income and low-income backgrounds are turning to AMCs for better annual returns.
AMCs can be studied from two standpoints; structural standpoint and product standpoint.
Structural Standpoints of AMCs
The structure of a traditional AMC consists of three divisions:
- A sales and marketing division.
- An investment and risk management division.
- A legal division.
The sales and marketing division is responsible for expanding the clientele. Sales reps work in tandem with marketing executives in top AMCs. They gather info on prospective clients with the help of marketing people who architecture and monitor the sales funnel. Based on the data collected, sales reps gauge the probability of turning them into actual clients. Finally, after doing all the research, they approach them and persuade them to invest in the AMC.
The investment and risk management team does the most crucial work. They decide which investment vehicle is suitable for investing the pooled money, what are the risks-reward ratio for each investment, and how to offset risks using hedges. The legal team ensures the AMC operates within the relevant regulatory framework. They are also responsible for handling litigation against the company.
Product Standpoints of AMCs
AMCs offer a range of investment instruments to their clients. Normally, an asset management company informs its clients where the pooled money is going to be invested. Stocks, debt, bonds, etc are the top choices. Periodic reports published by AMCs – typically every quarter or every year – disclose holding information. These reports go into depth, and break down holdings in terms of asset class or sector specificity. However, an AMC may not disclose all holding information as portfolios of high net-worth individuals might involve custom strategies.
Some AMCs let their customers access the capital or the bond market through their platforms, other AMCs handle all the investment decisions themselves. As mentioned already, equities, debt-based securities, mortgage-backed securities, commodities are among the top investment choices. If customers are to play the role of a depositor, and nothing else, the product in question is the rate of return that the AMC offers every year. Alternatively, if the customer is an active investor, AMCs offer several products to them such as mutual funds, debt funds, etc. AMCs like investment banks fall into the former category, whereas brokerage houses fall into the latter category. Customers of brokerage houses are active traders, who use the brokerage platform and associated trading tools as AMC products.
Advantages of AMCs
If an investor prefers a passive approach to investing, AMCs are the way to go. As mentioned before, passive investors are only focused on annual return. Most AMCs offer them a rate of return that is higher than the rate offered by bank savings account returns or even term deposit returns. And the investors don’t have to break a sweat. Money management and investment decisions are handled by experienced professionals working for the AMC.
Diversification is also a benefit of putting money in an asset management company. As AMCs invest in a larger number of instruments, the overall risk gets spread out and the volatility decreases. For example, if the equity market is down, the commodity market would be up, implying profit for some of the pooled money the AMC invested.
Regulatory compliance is an underrated benefit of contributing capital to an AMC. AMCs are subject to regulations that help protect investors’ interests. They follow all the relevant regulations to ensure responsible management of investors’ money.
Disadvantages of AMCs
Cost is the biggest disadvantage of putting money in AMCs. The fee structures in most AMCs are designed in a way that eats into the return. Also, fees could vary depending on the services provided. There could also be hidden fees. Because AMCs offer a range of services, fees are supposed to be very high.
The Loss of control is yet another disadvantage of investing with AMCs. Fund managers in AMCs make investment decisions, and clients never have a say in which specific bond or stock is to be purchased or sold. In defense of AMCs, most clients who are not savvy with active trading are fine with it, and it’s hardly an issue for them.
Final Words
Guaranteed return and ease of investing are the key reasons behind the rise of AMCs. Investing in the capital market, in the commodity market and in the bond market carries significant risks, and by putting their hard-earned money in AMCs, investors could reduce these risks. Hence, it is safe to assume that AMCs will undergo further growth, and more and more people, who don’t want to get their hands dirty with investing, will entrust their money to these financial institutions.
