Finance

Asset Management company

Asset Management Company

An Asset Management company is a company that pools funds from its clients and invests them in stocks, real estate, bonds, etc. Asset Management companies manage many hedge funds, pension plans as well as high net worth individual portfolios. They are also called money managers or money management firms.

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How do they manage funds?

Asset management companies collect funds from their clients and create pooled structures like mutual funds, exchange-traded funds, or index funds so they can manage them in one centralized portfolio. Because of the huge number of amounts, they offer investors diversification opportunities. They also practice economies of scale and get discounts on their purchases. Asset management companies charge a fee which is a percentage of the client’s total assets under management for their services.  AMCs are buy-side firms. This means that they help their clients buy investments by deciding what to buy depending on in-house research and data analysis.

How are they regulated?

In India, Asset management companies are regulated by the capital markets regulator, Securities and exchange of India (SEBI) as well as the Association of Mutual Fund of India (AMFI) for protecting the interests and rights of the investors.

In the United States, they are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Pros:

  • Economies of scale: Economies of the scale indicate the cost advantages that a company gains from pursuing a larger scale of operations. As the operations increase, the unit costs of operating decrease. They can get various discounts, bulk orders, etc.
  • Diverse asset classes: AMCs have access to invest in diverse asset classes that an individual investor wouldn’t. Due to a large number of funds they can invest in multi-billion-dollar projects, power plants, etc.
  • Professional expertise: Asset management companies hire finance professionals and experts to manage investments.

Cons:

  • Management fees: A lot of asset managers collect flat fees, which means that the fees are collected even if the investments don’t do well. After a period of time, this fee can get expensive for certain investors.
  • Risk of underperformance: Generally, AMCs have a benchmark to compare the performance against. There is always a risk of the investments underperforming.

Real-world example:

Following are some Asset Management Companies in India:

  • HDFC Mutual Fund
  • ICICI Prudential Mutual Fund
  • SBI Mutual Fund
  • Birla Sun Life Mutual Fund
  • Reliance Mutual Fund
  • Kotak Mahindra Mutual Fund
  • Axis Mutual Fund

Following are some international asset management companies:

  • BlackRock
  • Vanguard
  • Fidelity
  • State Street
  • Allianz
  • Capital Group
  • JPMorgan Chase

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Conclusion:

Asset Management Companies are firms that pool funds from their clients and invest them in various investment classes. They are called money managers or money management firms. Because of the large number of funds, they have many benefits like economies of scale, diversification of investments, etc. They charge a fee for their services.

Author – Abha Shetty

About the author – Abha is a second-year BMS student and FRM level 1 candidate. She is very intrigued by the world of financial markets and hopes to master the art of investing and trading.

 

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