An Asset Management Company (AMC) invests pooled funds from various investors across various market instruments. Also referred to as money management institutions, AMCs offer investors better diversification and investment options.
As a beginner unaware of the functioning of a stock market, choosing an AMC to invest in isn't easy. While AMCs do manage umpteen funds, choosing one for returns can be tricky.
So, choosing the right AMC is crucial to help you earn potential returns on your investment. Read on for a brief overview of AMCs and why their shares are increasing.
Reasons Why Shares of AMCs are Increasing
The upward trend noticed in the share price of Asset Management Companies in June 2023 is primarily due to the deferment of expense ratio reduction. An expense ratio is a percentage you must pay an AMC as a fee for managing your investments.
Simply put, the expense ratio is the per unit cost for managing and running mutual funds. This is calculated using the following formula:
Expense Ratio = Total expenses of AMC/Average AUM
The expense ratio is critical in deciding your returns, so you must consider this when selecting a suitable AMC. If the expense ratio is higher, your returns are likely to be on the lower side.
While a lower expense ratio may be favourable, ensure the objectives of the mutual fund align with your investment goals. Also, note that regular plans have a higher expense ratio when compared to direct plans.
This is because you are likely to incur lesser costs when you invest in a mutual fund directly without involving any intermediary. On the contrary, a regular plan involves a mutual fund agent, which results in additional charges.
With the recent SEBI meeting, AMCs are hoping to keep their profitability stable in the near future. One of the major income sources for AMCs is the expense ratio. When there is no deduction in this ratio, the decision can help AMCs display a good balance sheet.
Hence, the market can expect quarterly numbers in the wake of this decision by SEBI. With this proposal injecting optimism into the market, it is no surprise that AMC stocks witness an upward trajectory.
Role of an Asset Management Company in Managing Mutual Funds
Now that you are familiar with the working of AMCs, know that these institutions invest your corpus across a range of equity, debt and risk-adjusted instruments. However, they maintain a diversified portfolio by investing in low-risk and high-risk instruments.
The AMC will levy certain fees in exchange for investing your funds across various securities. They also consider market, industry, political, and return risks before selecting any security. Simply put, AMCs are entities registered by SEBI responsible for managing the assets of mutual funds.
Fund managers of these AMCs track the performance of various investment avenues and invest in specific funds after assessing macro and micro economic factors. The allocation of your corpus also depends on a particular scheme’s objective.
For instance, if it is an equity-based fund, your money will be predominantly invested in equities. Despite being an equity-focused fund, it is not mandatory for the fund manager to invest the entire corpus in equities.
The Asset Management Company will also invest a portion of your corpus across other investment options to mitigate the risk associated with equity funds. This way, AMCs ensure that your investment earns potential returns in the long run.
Furthermore, respective fund managers create a portfolio and decide the number of securities they plan to buy or sell. In simple words, the returns you get depend on the invested scheme.
The AMC checks and reviews the performance of the scheme to ensure you get better returns. However, when the market looks bearish, the AMC takes a call and makes relevant investment decisions accordingly.
While umpteen AMCs offer numerous schemes, choosing the right one can seem daunting. One way to assess the performance of an Asset Management Company is to check its AUM or Assets Under Management.
AUM implies the total market value of all investments an Asset Management Company maintains. Ideally, these firms are distinguished based on the AUM they generate. For instance, the SBI Liquid Fund maintained an AUM of ₹69,187 Crores as on August 17 2023. In contrast, the HDFC Liquid Fund recorded an AUM of ₹61,368 Crores as on August 17 2023.
Remember that mutual fund returns are subject to market risks and can vary depending on the market climate. Hence, it is always advisable to track the performance of a fund before selecting a specific AMC.
Benefits of Investing in AMCs
Like with any other company, investing in an asset management company can be a smart idea simply because these entities operate in the growth sector. Naturally, the upsides are clear. However, here are some other benefits to note.
Valuation figures make it easy to choose worthwhile AMCs
Steady growth as mutual fund investor number increase with each year
Plethora of options as more AMCs work to get publicly listed
Leading AMCs have had double-digit growth numbers
Suitable for many investor types as AMC stocks aren’t overly volatile
If you want to estimate your returns in advance, you can choose a fund that invests in AMC stocks, and use an SIP calculator. This digital tool uses a specific formula to compute the expected returns based on the investment amount, investment tenor, and expected return rate.
Now that you know how AMCs work and the benefits of investing in these firms, you can plan your investments accordingly. Before making any decision, do your due diligence and consider all risk factors involved. When choosing an AMC, consider factors such as the credibility of the asset management company, expense ratio and other factors.
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