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Asset Management Explained

Asset Management Explained

Table of Contents

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INTRODUCTION

Asset management and wealth management are synonymous phrases. A financial advisor who specializes in managing clients’ assets is called an asset manager. Although advice might be helpful, ultimately it is the client’s investing plan, risk tolerance, and financial situation that will determine what is best for their portfolio. Asset management services aid wealthy people and businesses by distributing their money between liquid (equities) and illiquid (real estate, for example) investments (funds).

An investment in an AMC is similar to purchasing shares in a mutual fund managed by the AMC. A fund’s rate of return is dependent on its performance in the underlying market. Gains might be much greater with a well-managed fund.

WHAT ARE ASSET MANAGEMENT ORGANIZATIONS?

Definition

A company that pools money from numerous investors to buy substantial quantities of capital assets is often referred to as an “Asset Management Company.” To grow, companies like these have to make choices about when, where, and how much to spend on assets.

Expert financial managers know how to analyze the market, diversify their investments, construct and analyze portfolios, and measure the returns on their holdings.

Characteristics

To put it simply, an AMC is a company that manages the investments of its clients in the financial markets.

Asset management companies (AMCs) can have as little as a few hundred thousand dollars, named as ‘asset under management (AUM)’, stored under management or as much as a few trillion dollars AUM.

When an AMC makes a substantial purchase on behalf of several clients, it can take advantage of economies of scale and reduce the overall cost to those clients.

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ROLE OF ASSET MANAGEMENT FIRMS

Overview

To fund its operations, an AMC pools resources from private and public investors to provide to its clients. In this way, the investor can make well-informed decisions and build a safe portfolio, free of surprises. A minimal fee or commission is charged to maximize returns for investors.

Key functions of AMCs

Asset Allocation

Every mutual fund has a specific financial goal that helps the manager limit the investing options. A common practice among debt-focused funds is to put no more than 20% of their AUM into equities. Furthermore, a balanced fund may elect to invest only 60% of its total assets in equities and bonds.

Research and Analysis

Researching potential investments is a daily chore for a portfolio investor. Analysts regularly study market, micro, and macroeconomic data, as well as fund performance, and report their findings to management.

Portfolio Construction

There will be an exclusive team of researchers and analysts who report their market findings and trends to the fund manager.

Performance Review

Even with disclaimers, investors and trustees will scrutinize an AMC’s investment decisions if they cannot provide a satisfactory explanation for them. All investors need to be brought up to date on all acquisitions, sales, adjustments to NAV, alterations to the portfolio, etc.

TYPES OF AMCs

Overview

Companies that manage assets can take numerous shapes and sizes, including:

  • Hedge funds

  • Mutual funds

  • Index funds

  • Exchange-traded funds

  • Private equity funds

  • Other funds

Boutique asset management firms

A boutique bank is a small institution that specializes in serving a specific clientele. There is no shortage of small businesses in the investment management and banking sectors. By focusing on a specific sector, client asset level, kind of banking transaction, etc., these smaller enterprises fill a void left by the larger firms.

Large institutional asset management organizations

There is a wide variety of institutional asset managers available, with the majority belonging to institutional investors including pension funds and insurance firms. Individuals and businesses can use the assistance of financial advising services to create and manage investment plans. Depending on their preferences, pension funds, and insurance firms may either operate with internal or external asset managers.

Independent asset management companies

Whereas conventional banks are owned and operated by a single financial institution, IAMs are completely independent.

Even though they are not financial institutions, independent asset managers nonetheless rely on banking services like bank accounts and custody accounts to store and invest their clients’ funds.

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MUTUAL FUNDS

These funds are a special form of investment organization that pool the money of many different investors, both retail and institutional and invest it in a wide range of different stocks and bonds on behalf of their unitholders.

Its types

Based on the ease of investment, these funds can be:

Open-ended funds:

Buying into these funds is not time or quantity limited. Shares can be bought or sold at any period of the year at the then-current net asset value. An open-ended fund is a good option for people who need access to their money frequently.

Close-ended funds:

Closed-ended funds have predetermined unit cap amounts, and investors can only purchase units for a specific period. The last day to redeem is the maturity date. However, to improve liquidity, schemes trade on stock exchanges.

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Mutual Fund Asset Class

Depending on the assets they invest in, these funds are categorized under the:

Equity funds:

If you invest in an equity fund, your return will be tied to the performance of the stock market. These investments are extremely risky, but might potentially yield big returns. These funds can be further subdivided into several different types based on their characteristics, including large-cap, mid-cap, small-cap, focused, and exchange-traded series funds. Equity funds are a fantastic option for advisors who are willing to take on some risk.

Debt funds:

Bonds, treasury bills, and other forms of fixed-income investment are the primary holdings of debt funds, a type of mutual fund. Debt funds, despite offering a lesser return, may be able to provide regular income and stability. Low-duration, liquid, overnight, credit risk and gilt funds are just some of the subsets that can be created by using duration as a dividing line.

Hybrid funds:

Hybrid funds are diversified investment vehicles that hold both fixed-income and stock market assets. The fund house might have a strict policy about how much of each type of investment to make, or they might be more open to negotiation. The two main buckets into which hybrid funds fall are “balanced” and “aggressive.” Multi-asset allocation funds are a type of mutual fund that invests across a variety of asset categories.

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Based on Investment Goals

Growth funds:

Growth funds invest substantially in high-performing stocks intending to generate capital appreciation. The possibility for significant returns makes these funds interesting to savers with a longer time horizon.

Tax-saving Funds (ELSS):

Equity-linked savings plans refer to such funds that invest mostly in company equities. Nonetheless, they are tax deductible under Section 80C of the Income Tax Act. Their financing distance is at least three years.

Capital protection funds:

These funds diversify their holdings between bonds and stocks. This may ensure the security of investments, reducing the likelihood of significant losses. Remember that any money you get back may be taxed.

Fixed-maturity funds (FMF):

Money in these funds will be put into debt market securities with maturities that match or are somewhat close to the fund’s own. For instance- a three-year FMF would invest entirely in short-term securities.

Pension Funds:

Advisors in these funds want steady long-term returns. They are a common form of a hybrid fund with low yields at the moment but the potential for higher stability in the future.

Risk appetite

To diversify your portfolio without taking on too much risk, mutual funds are another choice. Very low-risk and low-risk funds are typically classified as short-term investments (liquid or ultra-liquid funds) that attempt to hedge market risk. Inadequate profits are generated from them.

Allotting a portion of their assets to debt instruments, medium-risk funds are very similar to hybrid funds. Gains of any significance are to be expected only when the stakes are high.

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BENEFITS OF INVESTING IN THESE

Advanced Portfolio Management

In addition to the “expense ratio,” advisors in mutual funds also pay a “management fee” to cover the cost of hiring a “professional portfolio manager” to execute the day-to-day stock, bond, and other asset trades. Investment management advice from a professional is worth every penny spent.

Diversification

To reduce portfolio risk, these funds invest in a large number of different assets (often between 50 and 200). In many stock indexes, these funds have 1,000 or more stocks in their portfolios.

Convenience and Fair Pricing

Mutual funds are easy to buy and understand. Low minimum investment and daily trading at the net asset value at the end of the trading day (NAV). With this, day traders no longer have access to the price swings and arbitrage opportunities that they rely on.

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Featured Reports

Understand the macroeconomic situations that affect the global positioning of countries.

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Understand how the U.S. discrepancy in accordance to their debt creates a havoc. 

Sustainable blockchain technology has immense benefit for the environment which cannot go unnoticed.

About Us

We are Ruskin Felix Consulting (RFC), a global strategic advisory firm. For over a decade, we have partnered with clients worldwide to solve complex business and technology challenges. Whether you need strategic advice, market research, or solutions to make important decisions, we’ve got you covered.

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At RFC, we believe that every great idea deserves a chance to shine. With our expert guidance, cutting-edge strategies, and meticulous attention to detail, we’ll work hand in hand with you to create strategies and guidance that helps you scale, build and develop your idea into a ready product in the market.