All You Need to Know: A Basic Introduction to Asset Management and How It Works?

May 03, 2019 | 2 months ago | Read Time: 3 minutes | By iKnowledge Team

Asset Management

Most of us have some kind of wealth creation goals and therefore, we need to keep track of our assets. That way, you will know just what assets are available and what can be used to provide optimal returns. This is where ‘asset management’ comes into play as it can aid you in making better, more informed decisions about which assets to choose for your financial goals. So, what is asset management? Simply put, asset management refers to the handling of investments on behalf of others, which in this case is you. An asset management company (AMC) takes your investment capital and puts it to work in different investments including stocks, bonds, real estate, commodities, private equity, and more.

They handle investments according to an internally formulated investment mandate, or process. This process is largely carried out by ‘asset managers’ who are responsible for monitoring and maintaining things of value within a portfolio. They also make well-timed investment decisions on your behalf to grow your finances and portfolio. By working with a group of several investors, asset management firms can diversify your portfolio. This gives them access to higher value options with better capital appreciation prospects, as well as mitigating the associated risk.

How It Works

Having a professional financial expert or an asset manager handle your money for you is always a relief – especially if you are not market savvy. Asset management encompasses a holistic view of the entire lifecycle of your investments with one cardinal goal – to help you generate substantial returns and reach your wealth creation goals in a timely manner.

Even institutional investors like pension funds and corporates as well as high net-worth individuals often seek out the expertise of asset managers to oversee their investments. In turn, asset managers work with client portfolios by considering several variables, including your unique circumstances, risks, and preferences. They select positions customized for your income needs, tax circumstances, liquidity expectations, moral and ethical values, and personal psychological profiles.

As asset managers strive to grow a portfolio for their clients, their primary role is making smart purchasing decisions that will increase the overall value of your funds. This approach differs greatly to investment banks, brokerages and insurance firms, which focus on giving access to funds being sold – such as stock purchases, insurance policies and mergers and acquisitions. As a result, clients are usually able to put their faith in the expertise of asset managers, giving them a carte blanche role in the decision-making process.

Importance of Asset Management

The asset management industry is a huge, important and growing industry, that plays a vital economic and societal role in managing risk and return for its customers and in allocating capital. In fact,  the total assets under management by the Indian AMCs have increased by over 43% to Rs 24.44 trillion over the last two years[1], with individual investors accounting for over 99% of the folios.[2]

Ideally, the asset management process should easily translate into long-term financial plans. With a good financial plan in place, you can then assess which objectives are feasible, and which ones need to be prioritized. Under the leadership of an asset manager, your money is invested in line with the trust deed and the financial objective of the scheme. The process broadly contains four steps – asset allocation, research and analysis, portfolio construction and performance review. Adherence to this structured and thorough approach makes the difference between a mediocre and a stellar performance of your investments.

In India, AMCs act under the supervision of the board of trustees, but they are answerable to the nation’s capital market regulator, Securities and Exchange Board of India (SEBI). The Association of Mutual Funds in India (AMFI) is another statutory body that addresses investors’ grievances. Every fund house must comply with the set of risk management guidelines by SEBI and AMFI.

While an asset management company follows the investment objective of every scheme before investing, you still need to check its vintage and track record. Try to understand everything about the team you are trusting your hard-earned money with. Market savvy investors can also look at the performance history of various schemes managed by the AMCs. Moreover, the reputation of the asset management company and the credentials of your asset manager should also be kept in mind when selecting a fund house. Always, go through reviews, talk to other investors and check if the past performance has been consistent.

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