Finance / Mutual Funds · April 3, 2022

How Does Asset Management Company (AMC) Make Money

What is Asset Management Company

Asset management company, typically called AMC are an organization that take investment decision on the pool of money collected through mutual funds and pubic funds and plan a strategic investment on behalf of the investors.

Asset management company are a group of people held responsible and hold accountable for the mutual fund corpus, in order to plan the investments and generate returns for the investors.

Role of AMC

The follow are some of the roles that needs to be performed by the asset management company

  1. Secure and track the investments of various investors
  2. Conduct a thorough research analysis on the various stocks and find good investment options
  3. Hedge the investment to avoid risk of downside
  4. Invest the money strategically and generate positive returns for its investors

Here are four ways how AMCs make money

Earnings in the form of expense ratio

The asset management companies charge a certain fee from their investors in the form of an expense ratio. The fee is in terms of a percentage of the asset under management (AUM) of the organization. AUM can also be defined as the total money the AMC has got to invest.

For example, if an AMC has an AUM of Rs. 500 crores and charges an expense ratio of 1.5%, this means that the company will charge 1.5% of Rs. 500 crores i.e., Rs. 7.5 crores. Thus, this money will be charged to the investor in proportion to their invested money.

It is to be noted that if a mutual fund has an annual return of 12% and charges an expense ratio of 2.5%, then the net return made by the fund will be 12-2.5 = 9.5%.

Earning in the form of exit load charges

Exit load are a penalty charges by the AMC in case the investor fails to follow the obligation of holding the investment for a said duration.

A major mutual funds come in with a lock in period, which means the investor once invested in a mutual fund, cannot withdraw the money for a pre-defined duration. This duration can last from 7 days to 5 years.

In case the investor breaks the obligation to hold the money within the lock in period, the investor will have to pay extra charges, call exit load charges to the AMC. This charges can vary from 1-3%.

Advisory fees

In some cases, the AMCs provide their research analysis and investment advisory in exchange for a certain fee. This is yet another way for the AMC to make money. The advisory fees charged by the AMCs is subjective and depends on factors like profit potential, risk appetite, nature of client, base capital etc.

These advisory fees can be a one time fee, subscription model or on profit sharing basis. Hence, the nature of the payment terms completely depends on the mutual agreement between the client and the AMC.

Charges from portfolio management services

Portfolio management services are services provided by AMCs to high net worth investors to manage their money. This can be considered as a personal mutual fund for the desired investor.

Since portfolio management requires an intensive research and the AMC take high risk to meet the expectations, the AMCs usually charge a high fee for such services.

Conclusion

Understanding indirect vs direct charges

It should be noted that the expense ratio and exit load charges are included in the mutual fund’s NAV (Net Asset Value) and charged indirectly. Therefore, investors do not pay these costs separately.

On the other hand, advisory fees and portfolio management charges are direct charges as the investor needs to pay them separately and is not the part of the investment.

How can AMC increase their profits

The best way for an AMC to increase their profits is by encouraging investors to invest more money in their mutual fund. The more the investors will invest, the more will be the Asset Under Management. Thus, more will be the income from expense ratio charges.

Also Read: What Is Sharpe Ratio In Mutual Fund | How To Use It

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