Mutual funds are like financial baskets that hold a mix of assets such as stocks, bonds, and other securities. But do you think mutual funds are as simple as many investors coming together and investing? The working of mutual funds is much more complicated than that. And before you invest business money in mutual funds, you must know the structure of mutual funds in India. In this blog, we will make it easier for you to understand the structure and role played by each of its players.
In India, mutual funds are regulated by the Security Exchange Board of India (SEBI), and to protect investors’ interests, SEBI has set some guidelines pertaining to the functioning of mutual funds through the SEBI MF Regulations 1996. As per these guidelines, a mutual fund is structured as a three-tiered entity comprising:
- A Sponsor
- A Trustee
- An asset management company (AMC)
These three pillars form the core of creating and managing a mutual fund. However, their work wouldn’t be as effective without the invaluable support of additional key players. Custodians, registrar and transfer agents (RTAs), auditors, and fund accountants all contribute to the seamless operation of a mutual fund.
Let’s understand each pillar in detail.
The Foundation Layer: Fund Sponsor
At the very bottom of the three-part setup that shapes Mutual Funds in India is the Fund Sponsor. Imagine them as the trailblazers, the ones who kickstart the creation of a Mutual Fund. As per SEBI rules, a Fund Sponsor could be a person or a group that has the ability to set up a Mutual Fund and earn from managing it. This managing is done through a related company that takes care of the fund’s investments. This makes the Sponsor similar to someone who promotes this connected company.
The SEBI Journey: Creating a Mutual Fund
SEBI’s approval is sought by the Sponsor to initiate the process. Upon receiving the green light, a Public Trust is formed under the Indian Trust Act, 1882 and registered with SEBI. Trustees are then appointed to manage this trust, safeguarding the interests of unit holders and upholding SEBI’s mutual fund regulations. Subsequently, an Asset Management Company (AMC) is established by the Sponsor, compliant with the Companies Act, 1956 to govern the fund’s management.
The Sponsor’s Roles and Responsibilities:
– Appoint Trustees: Much like selecting the guardians of a treasure, the Sponsor appoints Trustees to oversee the fund’s operations. This requires the approval of the regulatory authority, SEBI.
– Establish an AMC: Under the Companies Act of 1956, the Sponsor establishes an Asset Management Company (AMC) to manage the fund’s day-to-day affairs.
– Registration with SEBI: The Sponsor ensures that the trust, which houses the mutual fund, is registered with SEBI. This step formalizes the fund’s entry into the regulatory landscape.
The Eligibility Crucible:
SEBI’s stringent eligibility criteria ensure that only entities with a commendable track record and financial standing assume the mantle of a Sponsor. The litmus test includes:
– Financial Experience: A Sponsor should boast a substantial record of engaging in financial services for at least five years.
– Profitable Legacy: Demonstrating its resilience, the sponsor should have clocked profits in a minimum of three out of the last five years, with a positive net worth.
– Financial Commitment: A tangible investment amounting to at least 40 percent of the AMC’s net worth.
– Ethical Foundations: Upholding the highest standards of ethics and fairness in every transaction forms a cornerstone of eligibility.
Trust and Trustees: Guardians of Trust
Trust and trustees stand as the second layer in India’s Mutual Fund structure. Think of them as the guardians of the fund. Trustees are usually appointed by the fund sponsor. Their vital role involves maintaining investor trust and overseeing its progress.
In simple terms, a trust is formed by the fund sponsor in favour of the trustees. This trust is managed by them, and they are accountable to investors. They act as primary protectors of the fund and its assets. Trustees can take two forms: a Trustee Company or a Board of Trustees.
These trustees diligently watch over the Mutual Fund’s operations, ensuring compliance with SEBI (Mutual Fund) rules. They also keep an eye on the asset management company’s processes. Any scheme from the AMC needs their approval before hitting the market. Trustees report to SEBI every six months regarding the AMC’s activities.
SEBI has laid out strict rules to prevent conflicts of interest between the AMC and the sponsor, emphasizing transparency. Thus, trustees must act independently to safeguard investors’ hard-earned money. Even trustees need to be registered with SEBI, and their registration can be revoked or suspended if any breaches occur. It’s all about ensuring the protection of investors’ money.
Trustee Setup: The Sponsor appoints four Trustees or forms a Trustee company with at least four independent directors. It is necessary that at least two-thirds of them have no connection to the Sponsor.
Key Duties: Trustees have crucial responsibilities. They sign an agreement with the AMC, explaining how it works. They ensure the AMC has transparent and pre-defined processes, staff (like CEO, CIO, fund managers), and more. Every scheme the AMC plans needs the Trustees’ approval before starting. They review transactions each quarter and give reports to SEBI twice a year to show they’re keeping a close watch.
Must Read: Mutual Funds – What Are They And How Do They Work?
Asset Management Company (AMC) – Orchestrating Investments:
AMCs, which stands for Asset Management Companies, are registered by SEBI and are responsible for handling mutual fund assets. In the world of mutual funds investment, the term AMC stands for Asset Management Company. These AMCs are established as trusts in India.
AMCs function as firms that gather money from different investors and use it to invest in various things like stocks, bonds, Government securities, and commodities. The mutual funds investment are chosen based on the fund’s goals.
Within an AMC, there are professionals known as fund managers. They’re appointed to oversee each scheme continuously, ensuring that the fund’s objectives are achieved. These fund managers are experienced and skilled in investments, and they’re supported by research analysts within the AMC.
In a nutshell, AMCs play a significant role in the world of mutual funds. They manage the collected money, invest it wisely, and employ experts to ensure everything goes as planned.
While the aforementioned are the key players in the structure of mutual funds in India, there are also other players.
Custodian:
The Custodian steps onto the stage as the vigilant guardian of the securities acquired by the AMC. Tasked with their safekeeping, the Custodian holds the key to secure asset custody, ensuring every security is accounted for and protected. They maintain a watchful eye over the mutual funds investment account of the mutual fund, ensuring meticulous record-keeping.
Registrar and Transfer Agent (RTA):
Enter the Registrar and Transfer Agent (RTA), the unsung heroes of investor servicing. With a network of offices, the RTA administers all investor records. Their role spans processing investor applications, purchase, and redemption transactions across different schemes and plans.
Auditors and Fund Accountants:
Auditors assume the vital role of auditing AMC’s accounts, ensuring they remain distinct from scheme accounts. This division upholds transparency. Fund accountants are responsible for calculating the Net Asset Value (NAV) of schemes, a pivotal metric for investors.
A Shielded Structure:
In India, the structure of mutual funds is meticulously crafted and monitored by SEBI, resulting in a fortified structure with each component’s roles and responsibilities explicitly defined. This robust arrangement ensures airtight security for investors’ funds. The trust structure offers a safeguard – only the Sponsor or AMC can manage your investments. In the event of fund house closure, your money remains protected, and if a fund house transitions ownership, you retain the choice to exit or continue. Amidst market risks, your funds are secure from any mismanagement by the AMCs.
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Disclaimer: Mutual funds are subject to market risks. Read all scheme-related documents carefully.
The content of this blog is not intended to serve any professional advice or guidance, and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
