Asset Management Company (AMC) Meaning
An Asset Management Company (AMC) refers to a fund house, which pools money from various sources and invests the same in purchasing capital on behalf of their investors. These firms make necessary decisions relating to where, when, and how much to invest in assets.
An AMC gathers funds from either individual or institutional investors and utilizes the same to raise client capital. It considers all the risk factors to make smart investment decisions and build a strong investment portfolio. The only aim is to ensure higher returns to investors in exchange for a lenient commission, fee, or charge.
Table of contents
- Asset Management Company (AMC) Meaning
- An Asset Management Company is a firm that pools funds from different sources and allocates the same to the available assets in the market, likely to yield maximum profits.
- AMCs help manage investor money and spend in assets and securities, thereby maintaining a diversified portfolio on behalf of their clients.
- The money managers carry out the functions properly, namely market analysis, fund allocation for assets, portfolio creation, and performance review.
- AMC is considered a buy-side entity given its need for information that would help it make smart and lucrative investment decisions.
How Asset Management Company Works?
An Asset Management Company determines the best way of asset utilization to reap maximum profits for clients. It manages investor money most effectively. Every AMC runs on a mutual fundMutual FundA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etc theme and is led by a fund manager and team. The company studies the market properly and thoroughly analyzes each dataset to set a financial objective.
When investors trust a fund house, i.e., an AMC, they expect to get the most out of the profit they share with these money managers. They are available in different forms and are classified as hedge fundsHedge FundsA hedge fund is an aggressively invested portfolio made through pooling of various investors and institutional investor’s fund. It supports various assets providing high returns in exchange for higher risk through multiple risk management and hedging techniques., mutual funds, private equity funds, index fundsIndex FundsIndex Funds are passive funds that pool investments into selected securities., exchange-traded funds, etc. The clients, however, include retail investors, institutional investors, High-net-worth-individuals (HNWIs), private sector, government organizations, etc.
The AMC accumulates the fund from the public and considers varied risks, including market risksMarket RisksMarket risk is the risk that an investor faces due to the decrease in the market value of a financial product that affects the whole market and is not limited to a particular economic commodity. It is often called systematic risk., industry risks, political risksPolitical RisksPolitical risk is defined as a risk that emerges as a result of a change in a country's governing body, posing a risk to investors in financial instruments such as debt funds, mutual funds, and equities., etc. Per the same, it invests in both high-risk and low-risk securities, including debts, stocks, bonds, pension funds, and others.
Moreover, their commission is normally a fixed percentage of the client’s total Assets Under Management (AUM). AUM is the total volume of assets the AMCs manage.
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What is an Asset Management Company (AMC)? Explained in Video
An AMC serves various functions altogether to ensure investor money is managed well. They aim at making the best investments to buy the most fruitful securities and assets. The Asset Management Company functions are divided into the following segments for more effective functioning:
#1 – Research and Analysis
The AMCs conduct thorough research and consider the current market trends to ensure the pooled funds are best utilized. In addition, they study multiple microeconomicMicroeconomicMicroeconomics is a ‘bottom-up’ approach where patterns from everyday life are pieced together to correlate demand and supply. and macroeconomic factorsMacroeconomic FactorsMacroeconomic factors are those that have a broad impact on the national economy, such as population, income, unemployment, investments, savings, and the rate of inflation, and are monitored by highly professional teams governed by the government or other economists. to assess the risks involved with each financial deal. Once the money managers understand the financial atmosphere, they shortlist and finally select the most profitable deals to invest in.
#2 – Asset Allocation
Based on their research and calculations, the AMCs list the assets and securities to spend the pooled funds in. Then, they allocate the funds to purchase assets. The profits reaped become the return on the investments. Every investor has a share in those returns based on the proportion of funds offered to the AMCs.
#3 – Portfolio Building
An Asset Management Company dealing in a mutual fund or other assets makes sharp investments for better returns. Once the market researchMarket ResearchMarket research refers to a business strategy wherein an organization analyzes the market trends, competition, and consumer preferences ahead of launching new products or services. It involves collecting and interpreting data during product development or marketing to help businesses make informed decisions. reports are studied and fund allocation is done, the next step is to build a strong, diversified portfolio for their clients. Finally, the fund managers determine all relevant factors and decide which asset or security to buy, sell, or hold.
#4 – Performance Review
When AMCs use the funds gathered from a different source, they automatically become answerable to those fund providers. As a result, money managers must make justifiable decisions. As a result, reviewing their performance from time to time is important. The fund managers or portfolio managersPortfolio ManagersA portfolio manager is a financial market expert who strategically designs investment portfolios. must be ready to justify a buy, sale, or hold positions.
Asset Management Company – Buy Side or Sell Side?
In financial dealing, there are two ends – one is the buy-side, and another is the sell-side. So far as the sell-side is concerned, it is any party that sells anything to another party. This “anything” could be a product, service, security, asset, piece of advice or information, etc. On the other hand, the buy-side is any party that buys the saleable item from the sell-side.
These money managing firms use market research and analysis techniques to understand current market trends. Thus, they end up purchasing relevant data analytics and other relevant pieces of information from investment banks and stockbrokersStockbrokersA stockbroker is an individual or company qualified enough to trade securities in the financial markets on behalf of financial institutions, individual and institutional investors, and organizations. They can work either independently as a professional trader or broker-dealer or associate with a brokerage firm.. As a result, they turn out to be the buy-side. Based on their purchase from the sell side, they make well-informed and smart investment decisions on behalf of their clients.
Let us consider the following examples to understand the concept more clearly:
Company A, an AMC, pools funds from the public sector ($5 million), private sector ($5 million), and HNWIs ($10 million). The company studied the market and observed that investing in mutual funds and bonds would be a good idea.
Company A invested in maintaining a diversified portfolio as per the market trend and reaping huge profits. It divided the profit based on the investors’ proportion of expenditure to pool funds.
The company kept aside the commission on a mutually agreed-on percentage out of the total profit. It paid the investors their share from the profit, which was more for HNWIs and less for the rest two institutional investors.
One of the most renowned AMC players is Vanguard, the renowned Pennsylvania-based investment advisor that manages a global AUM worth $7 trillion. It operates both as a brokerage firm and educational account services provider.
Vanguard is the second-largest exchange-traded fund provider for investors after BlackRock.
Frequently Asked Questions (FAQs)
An Asset Management Company is an entity that manages investor money in the best possible way and tries to invest the same in deals that are likely to reap maximum profits. Every AMC runs on a mutual fund theme, which a fund manager and team lead. It segregates its role by dividing its functions under different heads – market research and analysis, asset allocation, portfolio building, and performance review.
The advantages and disadvantages of an AMC include:
The top AMCs across the globe are as follows:
● Vanguard Group
● UBS Group
● Fidelity Investments
● State Street Global Advisors
This is a Guide to What is an Asset Management Company (AMC) & its meaning. Here we explain how AMC works along with its functions and examples. You may learn more about finance from the following articles –