If you have ever lived in a joint family, then you know that it is an age-old tradition that if there are three working sons in a family, then they all offer their earning to one man, the eldest one in the house, who decides where to spend? And how much? An asset management company, in simpler terms, is a firm offering that kind of service but for the money, you are left with after fulfilling all your needs i.e., basically, the savings that you want to invest. Why would such a firm exist? Firstly, because not everyone is an expert in investing. And secondly, who doesn’t want to get the benefit of economies of scale? If 100 people will give their savings to one firm who has experts to handle the sum, then they will get their money invested in opportunities that were earlier unaffordable with individual savings. But what would the Asset Management Companies get? That’s the question we will answer in this article.
Usually, Asset Management Companies cater to decently wealthy businesses and individuals because it can be hard to offer services to small savers at appropriate prices. Each client deposits cash in its portfolio. There are many such portfolios monitored by an Asset Manager. He talks to the client to get an overview of his/her expectations, risk-taking ability, tax liabilities, liquidity preferences and invests money accordingly by coming up with hedge funds at times. For providing this intricate service, a fee is charged which forms their revenue. This fee can be in the form of annual charges for availing the service, or of a certain percentage of the portfolio and shared profits being charged and at times a combination of both. So, if you go with a portfolio of 4 lakhs and it earns a profit of 1 lakh then you will have to surrender 10000 as fees if 2% was to be the rate of management fees.
But a few Asset Management Companies provide services to small investors by designing mutual funds and index funds for them. Such funds are less risky and ensure sustainable earnings by diversifying the pooled money.
Asset Management Companies manage hedge funds, mutual funds, and pension plans. Hedge funds employ more complex investment strategies catering to investors who have higher risk-bearing capacity whereas mutual funds focus on long term secured wealth generation. The main functions performed by the employees of Asset Management Companies are: –
- Asset allocation: The managers judiciously decide a combination of debt and equity instruments to invest clients’ money into depending on future prospects and interest rates. Generally higher interest rates make the debt more attractive.
- Make an investment portfolio: Managers are given collective funds to form a portfolio. They consider the risk aversion of investors and look for instruments with appropriate credit ratings. They construct a fund that doesn’t give major outlying returns even in turbulent times.
- Performance review: Since asset managers are answerable to investors, they publish periodic reports assessing the value of individual portfolios.
The amount earned from the commission or management fee charged is used to pay the salaries to these asset managers who are financial experts and engross themselves in market research and valuation. The size of Asset Management Companies is calculated using the net value of assets under management. These companies are regulated by the Securities and Exchange Board of India (SEBI).
Typically, Asset Management Companies focus on making buying easy for investors while on the other hand, Investment banks aim at getting the best buyers for their clients who are selling securities and investment instruments. So, in a way, we can say investment banks approach Asset Management Companies to seek buyers.
On the other hand, brokerage firms are the ones that help any client maintain the trading account and Demat account. So, to get transactions, Asset Management Companies, Investment banks, or any individual investor for that matter approaches a brokerage firm. Unlike Asset managers who are liable for the losses of the client, the broker is not accountable for transactions that result in losses. While an asset manager has discretionary powers, a broker can do only what the investor has asked him to execute as orders. The amount of liability or amount of compensation is decided in the court of law. The role of an asset manager is fiduciary in nature which means the client signs a document indicating his preferences and confirming trust in the expert. In case of disputes, the court examines if the manager had paid due diligence while making the decisions.
The success of Asset Management Companies largely depends on the returns its funds are able to generate. Once the goodwill base is made, investors grow bullish about those instruments, and prices/returns rise automatically because all those investors who are aware of the specific fund performing well but don’t own a share in it start pushing up its prices. India’s largest Asset Management Company is ICICI Prudential Asset Management Company Ltd.