4 Strategies Employed By Asset Management Companies Towards Fund Management

Investors who have diverse investment needs but are unsure about how to invest money can employ the services of an asset management company (AMC). Such firms typically manage funds collected from several different investors and decide where, when and how the funds are to be invested.

The collected funds are invested into a diverse class of assets which include stocks, shares, equities, securities, bonds, mutual funds and similar cash equivalents. However, AMCs must resort to several tools and techniques at their disposal in order to manage funds. Here are some strategies employed by asset management companies in India towards fund management.

The asset allocation strategy: Every type of investment done by the AMC, must help the investor attain his/her financial objective or goal and every investment instrument caters to a specific theme or goal e.g. mutual fund companies have definite short, medium and long term investment goals.

These goals enable the asset manager to narrow down and determine which mutual funds to invest in. For instance, most debt-oriented mutual funds allocate a maximum of 20% of their assets under management in equities. Similarly, balanced fund typically prefer to invest approximately 60% of assets in equities. As such, asset allocation is a crucial strategy that fund managers have to review on a daily basis.

The research and analysis strategy: While research and analysis is not so much a strategy, it is a crucial aspect of asset management and something that fund managers devote a lot of time to. In order to build a portfolio, analysts employed by the asset management company must have in-depth knowledge of the various investment products. They must also possess knowledge and study about the investment market, the macro and micro economic trends and the performance of various mutual fund companies and create reports on the same.

These reports are then passed on to the fund manager who takes decisions which can help a company rise above its peers by beating the benchmarks also known as apple to apple comparison. The fund manager also takes the final decision regarding stock selection, which ultimately decided the fund’s fate.

The portfolio construction strategy: Asset management companies basically use the services of a wide range of analysts and researchers who provide reports on their daily market findings as well as market trends to their fund managers. Based on the findings of the analysts and the investment objectives of the investor, the fund manager then chooses securities to purchase.

He also decides whether to hold on to the investments or to sell them off. This is the general strategy followed by all AMCs in order to build an investment portfolio. As such, the role of the fund manager is indispensable and it is his expertise and experience which can render an investment profitable or non-profitable.

The performance review strategy: Asset management companies should be able to justify their investment decisions. If they are unable to do so, they end up receiving a lot of flak form investors, which thereby affects their market reputation.

They must also inform investors about holdings that can have a direct effect on their investments. As such, they need to review the performance of the fund throughout the investment duration – before, during and after. AMCs must also update their investors regarding sales and repurchases, portfolio details and net asset value (NAV) of the investments.

AMCs make investment decisions after taking into account the different financial goals of the investors and their different risk appetites. This ensures that the investment is safe and in tune with the investors requirements