Asset Management Companies are SEBI registered entities which manages the assets of mutual funds. In order to understand the working of an Asset Management Companies (AMCs), let us first discuss how mutual funds work.

What is a mutual fund?

Mutual fund is a financial instrument which pools the money of different people and invests them in different financial securities like stocks, bonds etc. Each investor in a mutual fund owns units of the fund, which represents a portion of the holdings of the mutual fund. Let us now understand how asset management companies raise money from the investors.

The initial process of raising money is known as a New Funds Offer (NFO). To raise money from investors through NFO, the AMC has to seek the permission of the market regulator SEBI. Upon approval, the AMC informs the public about the NFO through Scheme information document (SID) which carries details like, investment objectives, nature of securities (stocks, bonds etc.), scheme taxability, minimum subscription amounts, exit load and other information which investors may find useful. A scheme can be close ended or open ended. Investors can invest in close ended schemes only during the offer period. Investments and redemptions are not allowed once the subscription window is closed. On maturity of the scheme, the units are automatically redeemed.

In an open ended scheme, investors are allowed to invest and redeem, on an on-going basis after the NFO closes. The assets under management (AUM) of open ended schemes change on a continuous basis due to fresh investments and redemptions. The money raised from investors is deployed by Asset Management Company (AMC) in different financial securities like stocks, bonds etc. The securities are selected keeping in mind the investment objective of the fund. For example, if the investment objective of the fund is capital appreciation, the fund will invest in shares of different companies. If the investment objective of the fund is to generate income, then the fund will invest in fixed income securities like bonds, non convertible debentures, money market instruments etc.

The Asset Management Company (AMC) appoints a fund manager (sometimes even two or more fund managers) to manage each scheme on an ongoing basis, to ensure that the investment objectives are met. The fund managers have the requisite investment expertise and experience to manage the assets of the scheme. AMCs also have teams of research analysts to support the fund managers. Retail investors usually lack investment expertise which the fund managers have and therefore, it is always beneficial for investor to invest in mutual funds, instead of investing directly in capital markets.

Sponsor of a mutual fund

Sponsor of a mutual fund is the promoter of the mutual fund. The sponsor makes an application for registration of the mutual fund with SEBI and provides the capital for setting up the mutual fund. The Mutual Funds are set up in India as a Trust. SEBI requires a sponsor to have at least 5 years track record in financial services business (e.g. banks, financial institutions etc). After SEBI’s approval the sponsor appoints a board of trustees to ensure full compliance of the mutual fund with SEBI’s requirements.

Role of the trustee

The trustees do not manage the assets of mutual funds directly; it appoints the AMC manage the assets of a mutual fund. The main role of the trustee is to ensure protection of investor interest. The trustees appoint a custodian for safe-keeping of scheme assets. The trustees monitor any new scheme introduced by the AMC and on an on-going basis closely monitors the AMC to ensure full compliance.

In this article, we have discussed how Asset Management Companies (AMCs) work. Protection of investor interest is the overarching consideration in how AMCs are setup, governed and regulated.