In this issue, we aim to provide an overview about the various constituents of a Mutual Fund.
Structure of the Mutual Funds in India:
In India, Securities & Exchange Board of India (SEBI) is a regulator of all Mutual Funds. SEBI has stipulated the legal structure for Mutual Funds in India, which has inherent checks and balances to protect the investors. Following is a representation of the stipulated legal structure for Mutual Funds in India.
Constituents of a Mutual fund:
* SEBI: Securities and Exchange Board of India (SEBI) was formed to regulate the securities market. As far as Mutual Funds are concerned, SEBI formulates policies and regulates the Mutual Funds to protect the interest of the investor.
* Sponsor: Sponsor means any person who establishes a Mutual Fund. The Sponsor of a Fund is akin to the Promoter of a Company as he gets the Fund registered with SEBI. A Sponsor has to satisfy certain conditions, such as capital requirement, track record (at least five years' operation in financial services), and a general reputation of fairness & integrity in all business transactions. The Sponsor forms a Trust and appoints Board of Trustees. The Sponsor, either directly or acting through the Trustees, also appoints a custodian to hold the Fund assets. It also floats an Asset Management Company (AMC) to act as an Investment advisors to the Mutual Fund. The Sponsor is the Promoter of the AMC and is required to contribute at least 40% of the minimum net worth of the AMC. Once the AMC is formed, the Sponsor is just a stakeholder. However, Sponsors do play a key role in supporting and promoting an AMC.
* Trust/ Board of Trustees: Mutual Fund is a Trust that pools the savings of a number of investors who share a common financial goal. Each scheme of a Mutual Fund can have different character and objectives. Trustees hold a fiduciary responsibility towards unit holders by protecting their interests. Sometimes, the Trustee and the Sponsor are the same or it could be different entities performing the roles. Trustees float and market schemes, and secure necessary approvals. They check if the AMC's investments are within defined limits, whether the Fund's assets are protected, and also ensure that unit holders get their due returns.
* Asset Management Company (AMC): The AMC is a company formed and registered under the Companies Act, 1956, to manage the affairs of the Mutual Fund and operate the schemes of such Mutual Funds. They are the ones who manage investors' money. An AMC takes investment decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV etc. It also exercises due diligence on investments, and submits quarterly reports to the Trustees. It charges a fee for the services rendered to the Mutual Fund Trust
* Custodian: Often an independent organisation, Custodian takes custody of securities and other assets of a Mutual Fund. Among public sector Mutual Funds, the Sponsor or Trustee generally also acts as the Custodian. The Custodian has custody of the assets of the Fund. As part of this role, the Custodian needs to accept and give delivery of securities for the purchase and sale transactions of the various plans of the Fund.
* Registrar & Transfer Agent (RTA): The RTA maintains investor records. Their offices in various centres serve as Investor Service Centres (ISCs), which perform a useful role in handling the documentation of investors. Investors invest in various plans of the Mutual Fund. The record of investors and their unit-holding may be maintained by the AMC itself, or it can appoint a RTA. These agencies are also registered with SEBI
Email: sanjay.bhatia@ventura1.com
The above information has been written for general guidance only. Please consult your own financial advisor before making any financial decision.