Updated July 21, 2023
Introduction to Asset Management Company
The asset management company (AMC) collects funds from individuals and corporate investors and invests them in diverse securities like stocks, bonds, real estate, fixed interest securities, etc.
The professional who is given the responsibility of managing the portfolio of assets of the client is known as a fund manager. These managers get paid through fees, usually a percentage of the total assets under management.
Explanation
Most Asset management companies need to be compliant with fiduciary standards. Since these companies have access to a larger pool of funds than an individual, they can provide investors with diverse options in the portfolio. These companies deal with several clients, which helps them achieve economies of scale apart from price discounts on purchases.
There is a pool of funds managed by these asset management companies, which pay proportionate returns to investors without restricting making minimum investment amount, which would have been the case if investors had invested on their own.
Role of Asset Management Company
- They manage client assets/funds on their behalf and invest them in the diverse nature of securities.
- They help in the growth of clients’ asset portfolios and finances.
- They allow them to invest in high-value securities while mitigating the risk associated with them, leading to better growth prospects.
- They direct these funds to different channels, like bonds, shares, and real estate, according to the objective and risk appetite of the client.
How Does it Work?
Asset management companies offer several portfolios according to the client’s financial objective. The company allows a fund manager for a particular portfolio, mainly responsible for making investment decisions regarding those portfolios that benefit the client. Every portfolio has different financial objectives catering to other clients’ needs. For example, some portfolios majorly have debt securities as the client’s requirement is consistent return; in this kind of portfolio, investment in equities does not increase more than 20%. Similarly, if the client has opted for a balanced approach, then investment in securities can reach up to 60%.
A Fund manager, through its research and analysis team, undergoes a lot of research, like noting market trends, studying micro and macro aspects of the economy, fund performances, and so on, before they construct different client portfolios. They also need to send periodic performance review reports of the investment portfolio to their clients, including NAV of the funds, trend analysis, etc.
Examples of Asset Management Company
Following are the names of a few Asset Management Companies (AMCs) that are in the list of top ten as per the value of assets managed by them:
- Blackrock, the US
- The Vanguard Group, the US
- Charles Schwab corporation
- Fidelity Investments
- J. P. Morgan Asset Management
Functions of the Asset Management Company
Below can be listed as functions:
- Asset Management Company helps in managing the investment portfolio of their clients.
- They provide a diverse choice of investment to individual investors while mitigating the risk associated with these securities.
- They act as an intermediary between investors who want to invest their funds and companies like insurance companies and pension funds, who want investment funds to grow their capital.
- They help companies meet their capital requirement, short-term and long-term.
Difference Between Asset Management Company and Mutual Funds
- A Mutual fund is a pool of funds or trust created from the funds of investors with similar financial objectives and is invested in diversified portfolios accordingly.
- On the other hand, the pool of funds is invested by Asset Management Company in a diversified securities portfolio, like bonds, fixed interest securities, real estate, etc.
- So, we can say that a Mutual fund is one of the investment options provided to the clients by Asset Management Company for managing the client’s portfolio.
Benefits
Benefits are given below:
- They help provide a systematic asset management framework for the investment of funds.
- They help provide their clients with effective investment strategies and, thus growth of their funds and finances.
- They provide their clients with a diverse investment choice with reduced associated risk.
- They have access to a large pool of funds leading to economies of scale.
Disadvantages
Disadvantages are given below:
- Most of the time, Asset Management Company caters only to the needs of high net worth or wealthy customers, so it doesn’t help individual investors with limited means.
- Asset management companies charge a hefty amount of fees from their customers, which puts an extra burden on them.
- Clients will have to bear the loss if they cannot manage the funds properly and mitigate the risk associated with the securities.
Conclusion
An Asset Management company is an essential part of the investment banking system. They play an integral role in collecting funds from investors and investing a pool of funds in diverse portfolios according to the need and requirements of their clients. They help individual investors benefit from investment in high-value securities with minimum investment amount restriction and mitigation of the risk associated with the securities.
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