Complete guide: Organizational structure of mutual funds in India
What is a mutual fund?
A mutual fund is an investment vehicle or a trust wherein investors pool their savings and share a financial goal. The collected money is invested in shares, debentures, and other mutual funds.
Do you want to know how mutual funds actually work and what the parties involved in it? Continue reading to know more.
The organizational structure of mutual funds in India?
Mutual Funds in India have a three-tier structure with few other significant components.
Banks or AMCs don’t just create these investment vehicles. Three main entities are involved: the Sponsor (creator of the fund), Trustees, and Asset Management Company (AMC).
All the mutual funds are regulated by SEBI – Securities Exchange Board of India, and the investors who purchase or invest in these funds are termed “Unitholders”.
1. A sponsor
Is a person or an entity that has the right to set up a mutual fund scheme to generate returns or income through common fund management.
They for the first part of the mutual funds’ structure in India. The Sponsor has to get the mutual fund scheme approved by SEBI first.
The Sponsor needs to create a Public Trust under the Indian Trust Act 1882 as they cannot work alone. A Sponsor’s role is crucial for a mutual fund and should have high credibility. The eligibility criteria to become a sponsor are
- The Sponsor must have made a profit in 3 out of the last five years, including the immediately preceding year.
- The Sponsor must have five years of experience in financial services.
- The net worth of the Sponsor must be positive for all the preceding five years.
Out of the total net worth of the AMC, 40% must be participated in by the Sponsor.
2. Trust and Trustees
The Trust and the Trustees form the second central part of the structure. Trustees are also the “protectors of the fund” appointed by the Sponsor.
The role of the trustees, as the name suggests, is to maintain the investors’ trust and work on the fund’s growth. According to the SEBI regulations, Trustees are supposed to provide a report on the fund and the functioning of the AMC on a semi-yearly basis.
The Trustee is responsible for supervising the entire functioning of the AMC and regulating the mutual funds’ operations. Due to the rule of transparency, the AMC cannot float a new mutual fund scheme without the permission and approval of the Trust.
The Trustees are required to be registered under SEBI. SEBI further regulates their registration by either suspending or revoking the registration if found breaching any conditions.
Additional read: How to choose the best mutual fund scheme?
3. Asset Management Companies (AMC)
The AMC is the third part of the mutual fund structure. An AMC is responsible for floating various schemes of mutual funds in the market, keeping in mind the investors’ needs and the market’s nature.
They take help from bankers, brokers, RTAs, auditors, etc., and get into an agreement with them while creating a new scheme. The AMC creates mutual funds, which also oversee its development along with the Trust and the Sponsor.
The AMC is responsible to manage funds and provide services to the investor.
A Custodian is an entity responsible for the safekeeping of the Securities. They are registered with SEBI and are responsible for transferring and delivering units and securities.
They manage the account of investment of the Mutual Fund, wherein investors can also track their investments and update their holdings.
Along with safekeeping, custodians also facilitate the collection of corporate benefits such as bonus issues, interest, dividends, etc.
5. Registered Transfer Agents
RTAs act as the bridge between Fund Managers and Investors. RTAs are SEBI registered entities that process mutual fund applications, assist with investor KYC, manage and deliver periodic investment statements or reports, update records of investors, and process investor requests.
6. Other Participants
Some other typical participants in the mutual fund structure are bankers, auditors, brokers, mutual fund distributors, etc. Brokers and distributors usually sell the mutual fund units to prospective investors.
Brokers also provide financial and investment advice after a thorough analysis, study, and prediction of market movements.
Auditors are independent internal watchdogs who audit and scrutinize account records and annual reports of various schemes. Bankers play an essential role in collecting agents on behalf of the Fund Managers.
Overall, India’s mutual funds structure is very well organized and highly regulated by SEBI. Moreover, the rule of transparency boosts the safeguarding of Investors’ money.
Nobody in the structure can misuse investors’ money and utilize it for anything other than what is specified in the investment objective of that fund.