Understanding the Investment Processes of Asset Management Companies
Asset management companies (AMCs) play a crucial role in the financial world by managing their clients' or investors' capital. This process involves a series of intricate steps, including the creation of investment products, allocation of capital, and execution of trades. In this article, we will delve into the methods and procedures that these companies use to invest in the stock market and bonds.
Investment Products Created by AMCs
AMCs are institutional clients to brokers and are responsible for creating various investment products, such as funds, tailored to meet the diverse market requirements of their clients. These products can be classified into different categories, each with its own investment focus. For instance, a bond fund is designed to invest exclusively in debt instruments, while a hybrid fund can diversify its portfolio across both stocks and bonds. Once these products are developed, they are made available to the public either as open-ended or close-ended funds.
Issuance of Investment Products
The next step involves the issuance of these investment products to the public through a process known as an Initial Offering (INO). This process can either be open-ended, allowing ongoing subscriptions and redemptions, or close-ended, with a fixed amount of capital that is not easily redeemable. Fund managers play a vital role in managing these pooled investments, allocating the collected capital into stocks and other securities based on the investment objectives outlined in the prospectus.
Trading Mechanisms and Regulators
A representative example of such a scenario involves a hypothetical AMC, BrilaSunlife Mutual Funds (BrilaSunlife MF), issuing an open-ended equity fund named Fund A, with a total capital of 100 crore. Fund managers use this capital to invest in stocks that have either long-term growth potential or short-term profit opportunities.
However, AMCs themselves are not allowed to directly buy or sell stocks because they are registered as asset managers, not brokers. Therefore, they have to use the services of registered brokers to execute trades. This involves going through intermediaries such as ICICI Direct, Kotak Securities, or CLSA to carry out the buying and selling of stocks on the stock exchange.
The Role of Custodians
In the asset management business, the role of the custodian cannot be understated. A custodian is a banker who is responsible for the administrative tasks of the fund, such as managing the day-to-day transactions and ensuring compliance with regulatory requirements. The custodian is a crucial player in the asset management cycle, as they are required by the Securities and Exchange Board of India (SEBI) to maintain the integrity and security of the fund's assets.
The Cycle of Asset Management
The entire process of asset management is a cyclical one, involving numerous transactions and activities. For a large AMC, this process may be managed by approximately 200 professionals, with different divisions working in concert to ensure that the fund's objectives are met efficiently. This continuous cycle of investment, monitoring, and reallocation is what keeps the fund performing optimally and meeting the needs of its investors.
Understanding the process of how asset management companies operate can be complex, but it is essential for both investors and professionals in the financial industry. By breaking down each step of the process, we can gain a clearer picture of how these companies manage their clients' capital in the ever-evolving landscape of the stock market and bonds.