Individual investors or new investors lack the experience of utilising their resources to consistently produce strong investment returns. This is precisely the time when asset management companies come to the rescue. Let us deep dive a little more about what an asset management company does.
What is an asset management company?
Asset management companies are firms that collect funds from various individual and institutional investors and invest in various securities such as stocks, bonds, and real estate. They own a dedicated team of fund managers who manage the investment and the research team selects the right stocks or securities to invest in.
Fund managers identify investment options that align with objectives. For instance, if the fund objectives are to receive steady returns with low risk, then the appropriate investment option will be to invest in bonds issued by government firms or private firms. If the fund’s objective is to get maximum returns then the investment will take place in equity markets for investing in shares.
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The reputation of the asset management company (AMC) plays a pivotal role for the investors to invest in funds.
How does an asset management company work?
When investors invest in an asset management company they are investing in a fund managed by the firm. The return of the investment depends on the performance of the fund that is market-linked. A well-managed fund can give higher returns.
The source of revenue for asset management companies is through charging fund management fees from the investors. A fund is expected to generate maximum returns in its categories to increase its investor base.
The reputation of the asset management company (AMC) plays a pivotal role for the investors to invest in funds. To strengthen the investor base and deliver quality returns, an asset management company follows a three-step process.
Efficient Asset Allocation:
To maximise returns for its investors, AMCs invest their money in different investment instruments. The distribution of funds into the equity or debt market depends on favourable market conditions and interest rates. Here, the experience and expertise of fund managers play an important role in efficiently allocating money to different asset classes.
Formulating an Investment Portfolio:
Building an investment portfolio is crucial for any asset management company. For, it undergoes rigorous research and analysis so that the portfolio becomes risk-proof, and resilient during turbulent market conditions. Fund managers make investments taking calculated risks.
Assessment of Performance:
Asset management companies are answerable to their investors for the fund performance. It sends regular updates on sales and repurchases NAV (Net Asset Value), portfolio details to its investors.
How should an investor select an asset management company?
The money that investors put in is their hard-earned money, therefore investors should take extra precaution in an asset management company for themselves. Experienced investors should check the performance history of mutual funds schemes managed by the asset management company during times of market volatility. While choosing an asset firm they can do the following:
- Check the reputation of an asset management firm by assessing the consistency of returns delivered from its fund management
- Check the reviews of the firm by taking feedback from other investors.
- Check the investment style of the fund manager. The returns received relies on the sound skills and investment style of a fund manager. Generally, mutual fund investment styles help one to gauge the competence of an asset management company.
The asset management companies are regulated by the Securities and Exchange of India (SEBI) and passively regulated by the Association of Mutual Fund of India (AMFI).
Advantages of going with an asset management company
- Assets are managed by experts.
- Returns are confirmed despite market volatility.
- Well-diversified portfolio
- Improvised investment options
There are many products that are not available for individual investors to invest in but with asset management firms, investing in those wide ranges of financial products is possible.
Drawbacks of asset management firms
- Can be expensive for investors as the firms sometimes charge exorbitantly to manage assets.
- If the market underperforms and the fund manager is unable to defend the risk it can result in huge losses.
- Few asset management companies restrict their services to wealthy investors having high net worth, government entities, financial intermediaries, and the different corporations and shabbily manage the portfolio of investors not fulfilling the prescribed wealth criteria of the company.
