A Beginner’s Perspective
The essential purpose behind writing this article is to provide you with: 1. A perspective on how Asset Management companies (commonly known as Mutual Fund houses) run
2. What their business & revenue model is; and
3. A beginner’s perspective on various positions/roles benchmarked as part of annual C&B survey.
Before I dive into the definition of an Asset Management Company, it is important that we have a basic understanding of stocks, bonds & a couple of other terms commonly used in the context of an AMC. (A) Stocks
Stocks represent shares of ownership in a public company. Examples of public companies include Reliance, ITC, Tata Motors, Satyam (God knows its future( ). Stocks are the most common ownership investment traded on the market. (B) Bonds
Bonds are basically a chance for you to lend your money to the government or a company. You can receive interest and your principle back over predetermined amounts of time. Bonds are the most common lending investment traded on the market. There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds. (C) Net Asset Value (NAV)
It is defined as a mutual fund's price per unit. The per-unit rupee amount of the fund is derived by taking the weighted average of all the securities in its portfolio. Example: If a mutual fund has 20 shares of ICICI Bank (value per share= INR 500), 10 shares of Reliance Industries (value per share= INR 1800) and 5 shares of Satyam (value per share = INR 20), the NAV of that fund becomes= (500*20 + 1800*10 + 20*5)/(20+10+5)
In the context of mutual funds, NAV per share is computed once a day based on the closing market prices of the securities in the fund's portfolio. All mutual fund’s buy and sell orders are processed at the NAV of the trade date.
Now let us begin with what is the real objective of an AMC.
Motto: Derive Best Value for Asset (your money) Invested
An 'Asset Management Company' is a firm that invests the pooled funds (hence the name ‘mutual fund’) of retail investors (like you and me) and institutional investors (insurance companies, pension funds, corporate customers) in various securities. An AMC collects money from investors by way of floating various mutual fund schemes.
Inclination towards Mutual Fund Schemes
There are numerous benefits that an investor can enjoy through mutual funds. Some of the most prominent ones (including the ones I have experienced as a first-time investor in mutual funds!) are: (1) Professional Investment Service: For an annual fee (a % of your funds managed), the investment company provides full-time, high-level professional management service than is normally available to individual investors. (2) Low Cost: By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. You might ask how. For example: If you want to invest in a share of Reliance Industries Ltd. (RIL), you'd need INR 3000. At present, you only have INR 2000. Similarly, another investor in another corner of the country has INR 1000 & wants to invest in RIL. What a Mutual Fund company would do is collect the investment amounts from you & the other investor & buy that share of RIL. The profits accrued from the rising stock value would then be apportioned between you & the other investor in the ratio 2:1 (ratio of the investment principal).
(3) Diversification: Diversification is the idea of spreading out your money across many different types of investments. When one investment is down another might be up. Choosing to diversify your investment holdings reduces your risk tremendously.
The most basic level of diversification is to buy...