How Asset Management Companies work in India

Asset Management Companies (AMCs) are SEBI registered entities which manages the assets of mutual funds. In order to understand the working of an Asset ManagementCompany (AMC) in India, let us first understand what are mutual funds in India

What is a mutual fund?

As we have seen that Mutual fund is a financial instrument which pools money of different investors and invests them in different financial securities like stocks, bonds, money market instruments and Government Securities etc. based on the scheme mandate and objective. Each investor in a mutual fund scheme owns units of the fund, which represents a portion of the holdings of the mutual fund scheme.

Let us now understand how asset management companies (AMC) raises money from the investors for a mutual fund scheme.

The initial process of raising money is known as New Fund Offer (NFO). New fund offers are open for a particular period (normally 15 days). To raise money from prospective investors in the scheme through the NFO, the AMC has to seek permission of the market regulator SEBI by submitting the desired documents which includes the Scheme Information Document (SID) and Key Information Memorandum (KIM).

A scheme can be close ended or open ended. Investors can invest in close ended schemes only during the NFO period. Investments and redemptions are not allowed once the subscription window is closed for closed ended funds. On maturity of the scheme, the units of the close ended funds are automatically redeemed and the fund value is paid to the investor.

In an open ended scheme, post the NFO period, the old and new investors are allowed to invest and redeem/ switch on an on-going basis.The AUM of open ended schemes changes on a continuous basis due to the on-going fresh investments as well as redemptions.

Once the scheme is approved by SEBI, the AMC informs the general public about the NFO through Scheme information document (SID) which carries details like, investment objectives, nature of securities (stocks, bonds etc.), scheme tax ability, minimum investment amounts, exit load and other information which is mandatory for the investors to know.

The money raised from investors is deployed by Asset Management Company (AMC) in different financial securities like stocks, bonds, Government Securities and money market instruments etc according to the investment objective of the scheme. For example, if the investment objective of the fund is capital growth, the fund will invest in shares of different companies. If the investment objective of the fund is income generation, then the fund may invest in fixed income securities like bonds, non convertible debentures, money market instruments etc.

The AMC appoints a fund manager to manage each scheme on an ongoing basis, to ensure that the investment objectives of the schemes are met. The fund managers are assisted by a team of research analysts to support the fund managers. The assets under management (AUM) of open ended schemes change on a continuous basis due to fresh investments and redemptions

Sponsor of a mutual fund

The Mutual Funds are set up in India as a Trust. The 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 which is now minimum Rs 50 Crores for setting up the mutual fund. 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 Board of Trustees does not manage the assets of mutual funds directly rather it appoints the AMC who manages the assets of a mutual fund.The role and responsibility of the trustee is to ensure protection of interest of the investor. 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.

Role of custodian: Custodians are banks or similar financial institution who are registered with SEBI and is responsible for holding and safeguarding the securities owned by a mutual fund.

Role of Registrar and Transfer Agent: The AMC appoints the registrar and transfer agent (R&T) to the mutual fund schemes. The R&T agents process the application form post validation of mutual fund KYC norms, redemption requests and other financial and non-financial transactions and dispatches account statements known as SOA (Statement of Accounts) to the unit holders. The R&T agents also handle communication with investors and also do fund accounting and updates investor records.

Some of the Top Asset Management Companies in India are –

ICICI Prudential Asset Management Company Limited

Aditya Birla Sun Life Asset Management Company Limited

HDFC Asset Management Company Limited

SBI Funds Management Private Limited

DSP BlackRock Investment Managers Private Limited

Reliance Nippon Life Asset Management Limited

Sundaram Asset Management Company Limited

Franklin Templeton Asset Management (India) Private Limited

UTI Asset Management Company Limited

Kotak Mahindra Management Company Limited