Mutual funds and asset management companies (AMCs) have a lot in common. For example, they both invest on behalf of individual investors and groups through similar types of securities. Given these similarities, the differences between these two organization types may be difficult to discern.
Mutual funds differ from asset management companies in the scale of operations, nature, management structure, and how their investors make money. AMCs are larger in scale and have a more robust management structure, while mutual funds have a dual nature and more ways to provide returns.
Read on for an eye-opening discussion as we delve deeper into the four primary ways mutual funds differ from asset management companies.
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Table of Contents
An Overview of Asset Management Companies
An Asset Management Company (AMC) is a firm that pools funds from many individuals and makes investments on their behalf. The pooled funds may be invested in several ways, including real estate, stocks, master limited partnerships, and bonds.
AMCs also go by the names money management firms or money managers. They come in various structures, with the most popular being:
- Hedge funds
- Index funds
- Exchange-traded funds
- Private equity funds
They handle different clients, including retail investors, private sector investors, government organizations, high-net-worth individuals, and institutional investors.
A Brief on Mutual Funds
Being a form of an AMC, mutual funds also pool funds from different people and invest that money on their behalf. Investment may be through different securities that include bonds, money market instruments, and stocks.
The value of a mutual fund hinges on the performance of the securities it chooses to invest in. So when you acquire a share of such an organization, you’re essentially buying into its portfolio’s performance. In other words, shares of mutual funds denote investments in various securities (as opposed to a single holding).
A typical mutual fund is run by a money manager. This person oversees the fund’s management, ensuring that its assets are invested according to the objectives outlined in its prospectus. Ultimately, the goal is to maximize investors’ income or capital gains.
Mutual funds may be classified according to structure or the type of underlying investments. Based on the structure, there are three types:
- Open-end funds
- Unit investment trusts
- Closed-end funds.
Note: Exchange-traded funds (ETFs) are sometimes recognized as an independent type of mutual funds because they combine elements of unit investment trusts and open-end funds.
Classification based on the underlying securities gives rise to three primary mutual fund categories:
- Stock funds
- Money market funds
- Bond funds.
The Primary Differences Between Mutual Funds and AMCs
Although both AMCs and mutual funds pool together funds from different investors and put that money to work on the investors’ behalf, there are some differences between these two organization types when you compare them based on:
- Scale of operations
- Legal structure
- How investors make money through each
- Management structure
Let’s discuss each area of distinction independently in the next section.
Scale of Operations
AMCs are larger in scale than mutual funds. Most AMCs will have several mutual funds under their management, and most mutual funds are a part of a bigger investment company (doesn’t necessarily have to be an AMC).
When an AMC manages several mutual fund schemes, the funds don’t necessarily need to have the same investment objectives. Instead, each mutual fund can have its own objectives to serve different investor categories.
If the investment objectives vary across mutual funds in an AMC, different professional money managers will oversee each fund to ensure it follows its goals. However, when several funds share an objective, they may be run by one money manager through a centralized portfolio.
Key Distinction: AMCs are typically larger organizations than mutual funds. One AMC can manage several mutual funds, but the reverse isn’t true.
Legal Structure
Another way to differentiate mutual funds from AMCs is by looking at how both organization types are recognized under the law.
Mutual funds have a dual nature in that they can be treated as independent legal entities and conduits between investment managers and investors. Traditionally, the latter has always been true for mutual funds.
But as Aaron McParlan points out in his review of the Lutheran Brotherhood Research Corp. v. Commissioner case, there’s a line separating a mutual fund’s conduit and independent entity statuses. While this line may be thin at times, one thing is clear: for tax purposes, a mutual fund is an independent legal entity that’s separate from its investors.
Unlike mutual funds, AMCs don’t have a dual nature. Instead, they’re strictly companies in nature (meaning they’re independent legal entities) and are treated as such for tax purposes.
Key Distinction: A mutual fund can be an independent legal entity and a mere conduit between asset managers and investors, whereas an AMC is strictly an independent legal entity.
How They Make Money for Investors
As an investor, there are three ways you can make money through a mutual fund:
- Dividends and interest. A mutual fund may pay out dividends on stocks held in its portfolio. If bonds are part of the portfolio too, investors may also be eligible for interest. Most funds will pay out almost all of the income earned over the year and give investors the option to either reinvest their returns or receive them in the form of a check.
- Capital gains. Capital gains result when the securities held in a mutual fund’s portfolio gain value. In most cases, these gains will be passed on to investors through distributions.
- Profits from share sales. Sometimes, the shares of a mutual fund will gain value, but the fund manager won’t sell. In such cases, you can sell your shares at a profit.
On the other hand, AMC’s primary benefit to investors is making well-calculated purchasing decisions that will grow their clients’ portfolios and subsequently increase the value of their funds.
Key distinction: Mutual funds provide returns in more ways than AMCs.
Management Structure
Typically, mutual funds are run by fund managers. However, if the fund is set up as a virtual company that’s legally independent of its investors, the fund manager acts as both the CEO and investment advisor.
Mutual fund managers answer to a board of directors and have a legal obligation to act in the funds’ best interests.
Apart from the fund managers, there aren’t many other employees in mutual funds except accountants, compliance officers, and probably attorneys and financial analysts.
When a mutual fund is part of a larger AMC, the fund manager will be appointed and assigned by the AMC’s administration. The fund won’t have any other designated employees such as accountants, compliance, and attorneys because these people will already be part of the AMC’s workforce before it takes the fund in question under its management.
Speaking of AMC’s management, it’s not too different from a typical investment company’s governance structure. The core departments are:
- Fund Management
- Sales & Marketing
- Operations & Accounting
- Compliance
Depending on the organization, these may be complemented by other departments such as risk management, corporate affairs, and internal audit. Some AMCs may combine several departments into ones with a broader scope of duties.
In terms of governance, a typical AMC will have at least the following levels (in descending order):
- Supervisory board
- Board of Directors
- CEO
- Department heads/managers
Key Distinction: A typical AMC has a more robust management structure, with more departments and governance levels than mutual funds.
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Conclusion
Let’s quickly summarize what we’ve covered in today’s discussion:
Although both mutual funds and asset management companies invest on behalf of investors, they differ in terms of the scale, nature, management structure, and how they provide returns.
Mutual funds give investors more options for receiving returns and have a dual nature in that they can be independent companies or mere conduits between investors and investment managers.
On the other hand, AMCs are treated strictly as companies. They’re also larger in scale and have a more robust organizational structure than mutual funds. I hope that clears up everything!
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