Mutual Fund is a professionally managed asset which is handled by an asset management company, it includes money from a group of individuals, and invested in assets as mandated by the fund. It is set up in a Multi-tiered structure with sufficient regulatory protections.

 

Structure of Mutual Funds in India

Mutual Fund is into three-tiered systems to include;-

MUTUAL FUND SETUP IN INDIA-INFOGRAPH

  1. Sponsor.
  2. Trust/Trustee.
  3. Asset Management Company.
  4. Custodian.

The Multi-tiered structure of Mutual Fund gives it a stability and also acts as protection for investors.It is a very well organised and regulated system in India. It has come a long way since the inception of first Mutual Fund in India in the year 1963 and has evolved over the years to become a professionally managed system.

 

Mutual Fund Sponsor

The Mutual Fund Sponsor can also be called as the promoter of the Mutual Fund.Mutual Fund Sponsor is a person or an entity who set up Mutual Fund to earn money by the management of the Mutual Fund.

  • Criteria for selection of Mutual Fund Sponsor- SEBI has put in some regulations for them. Some of them are as follows.
  1. A Mutual Fund Sponsor has to have prior experience of financial services of a certain period as mandated by SEBI, and need to have positive net worth during that time.
  2. The net worth of the sponsor should be greater than the contribution for the AMC.
  3. Minimum of 40% of share in the AMC.
  4. Should be in profit in 3 out of 5 years of managing of a financial service.

An example of Sponsor is HDFC Bank which has sponsored HDFC Mutual Fund.Once the Mutual Fund sponsor has been approved by the SEBI then it/they go about setting up Trust and Asset Management Company.

Mutual Fund Trust/Trustee

After approval by SEBI, a deed is used by Sponsor to create a Trust to be run by Trustee.There are strict stipulations by SEBI regarding the selection of the trustee.

  • Should be a person of integrity, ability and standing.
  • Should not be guilty of moral turpitude.
  • Should not have been convicted of an economic offence and should not have violated any securities law.

There should be a minimum of 4 trustee or board directors.At least 2/3rd members should be independent, not associated with the sponsors in any way.The role of Trustee is very important. they keep a tab on the functioning of the AMS and ensure following of the various SEBI regulations.For floating of any Mutual Fund scheme, the AMC has to take concurrence of the Trustee.The trustee also has to periodically meet SEBI regarding the functioning of AMC. They are also responsible for the appointment of key people posts like the Fund Manager, Auditor, officerCompOfficer, Registrar and Custodian.

Mutual Fund Asset Management Company (AMC)

It is appointed by either Sponsor or Trustee. Chief Investment Officers (CIO), Fund Managers, Analysts and others together form AMC. The role of AMC is to manage funds, launch various schemes, inform investors of the schemes and provide them services. they are given a fee for discharging their duties.More about Mutual Fund AMC here.

Mutual Fund Custodian

Whenever the AMC buys assets, it does so in the name of the trust, but these are not kept with the trust, rather Custodian takes the possession and thereby acts as an extra layer of security. The Custodian keeps possession of assets, either in physical form or Demat form, carries out delivery and transfer of securities.The Custodian is in charge of keeping track op things like interest, dividends etc. They charge a fee for their services.



Other elements of Mutual Fund setup

Other than the elements mentioned above as part of the multi-tiered structure set-up of Mutual Fund, there are many more which help in the smooth functioning of the Mutual Funds.Some are mentioned as follows;-

  •  Registrar and Transfer Agent(RTA)– The RTA help the mutual fund in record keeping, document filing and providing one stop back end services to Mutual Fund house to help them reduce costs and serve the investor better. Further about Registrar and Transfer Agent can be found here.
  • Auditor-Independent Auditor is hired by the AMC to scrutinise books and check finances of each scheme. They ensure that proper accounting procedures are being followed.The AMC and Mutual Fund schemes are audited by different auditors to maintain transparency.
  • Brokers– They are utilised by the AMCs to sell the schemes and propagate the awareness and knowledge about various schemes. The Mutual Fund managers also use the reports and various research material for their investment activities. the Brokers work on fees/commission model. As a safeguard, if the broker is related to the AMC then they can’t source more than 5% business through them, for example, if HDFC bank is acting as a broker for HDFC MF, then it can’t sell more than 5% of the AMCs business/schemes.

 

Regulation and Monitoring of Mutual Funds In India

 
There is a very strict and robust system for regulation of Mutual Funds in India. The main regulatory body is SEBI. It has various legal and executive powers to keep checks on Mutual Funds.Following bodies help carry out this job
  1. SEBI.
  2. RBI.
  3. FINANCE MINISTRY.
  4. VARIOUS STOCK EXCHANGES.

Conclusion

Mutual Funds have a very well regulated and managed structure in India. It is well diversified into multi-layers wherein each element has different jobs and responsibilities. Also, this has evolved quite well over the years and SEBI takes an active interest to take care of the investors and keep abreast with the changing times and environment.