In very simple terms, Mutual Fund is where several investors who share a common investment objective invest their money intending to earn returns.
This pool is managed by an expert in the business known as the Fund Manager. Each Mutual Fund has a different investment objective, which is set by the Fund Manager before launching the Fund in the market. Based on the objective the Fund Manager picks up the financial securities and sets its risk and return expectations.
For example, If the objective of the Fund is wealth conservation, then the Fund Manager would invest most of the assets that they have in Debt and Liquid instruments, which are less risky and give stable returns.
Main Components that form the Mutual Fund structure in India
In India, Mutual Funds are constituted as Trusts and are governed by the Indian Trust Act, 1882. It is a 3-tier structure consisting of the Sponsors, Trustees, and Asset Management Company(AMC). And all the components that form part of the Mutual Fund Structure are registered members of the SEBI. Let’s discuss each one in details below.
A person or a group of persons is the first layer of the structure of a Mutual Fund who start a Mutual Fund can be termed as Sponsors. Well like in the Corporate world the one who starts a company is known as a promotor, in the same way, the person or group of persons who starts the Mutual Fund is known as Sponsor. For example, HDFC Mutual Fund is sponsored by HDFC Bank and Standard Life Investments. The Sponsor alone cannot run the entire Mutual Fund Company, right? So, they appoint Trustees.
Now, since the Mutual Funds are regulated by Securities and Exchange Board of India (SEBI). Therefore, SEBI has laid down certain eligibility criteria for the Sponsors:
- The sponsor must have a minimum of 5 years of experience in Financial Services sector.
- Sponsor’s net worth should be greater than the capital contributed in the immediate last year.
- The sponsor will have to disclose the profits in 3 out of 5 years including the immediate last year.
- The sponsor should be having a minimum of 40% share in the total net worth of the Asset Management Company (AMC).
A person or a group of persons appointed by the Sponsors who are going to look after the functioning of the Mutual Fund like whether everything is going accordingly or not, whether the Mutual Fund is complying with the regulations of SEBI or not, etc. The Trustees form the second layer of the Mutual Fund structure. So basically, they have a very important role in maintaining the trust of us i.e. the investors as they are the ones who would be responsible if something goes wrong. They are responsible to protect your money as an investor because it is the Trustee who regulates the operations of Mutual Fund schemes.
The Trustees appoint the Asset Management Company (AMC) and defines its functioning. The AMC has to get the approval of the Trustees before launching any Mutual Fund Schemes.
The trustees have to compulsorily submit the reports regarding the Fund and the functioning of the AMC to the SEBI on a half-yearly basis. Therefore the chances of any wrongdoing happening are very less as it is properly regulated and looked over by the SEBI.
For example, HDFC Trust Limited is the Trustee of HDFC Mutual Fund.
3. Asset Management Company (AMC)
As the name suggests AMC is responsible in managing the assets of the Fund House. AMC is a company or a group of companies appointed either by the Trustees or the Sponsors working as the third layer of the structure of Mutual Fund. AMC is responsible for launching various schemes under the Mutual Fund house and managing them.
The AMC appoints the Fund Manager. And these Fund Managers take the decisions regarding the portfolio of the scheme i.e. when to invest, where to invest and how much to invest.
For example, HDFC AMC is the Asset Management Company of HDFC Mutual Funds.
Other components of the Mutual Fund Structure
There are other components also that are the part of the Mutual Fund structure in India. They are:
Custodian is a company appointed by the Trustees. When the assets are purchased by the Fund House in the name of the investors, these assets are not held by the Fund House. It is the custodian who is given the custody of the units and the custodian must safeguard and protect the securities.
The Custodian is the one who looks after the distribution of securities, ensures whether the funds are paid when the units are bought by investors like us, and is responsible for tracking and collecting the benefits like dividends, interests, bonuses, etc from the companies.
For example, HDFC Mutual Funds has 3 custodians:
HDFC Bank Limited which provide services to 47 schemes. Citi Bank manages 9 other schemes. Deutsche Bank is the custodian for all the remaining schemes related to Gold.
2. Registrar and Transfer Agents (RTA)
Registrar and Transfer Agent (RTA) can be considered as a link between the Investors and the Fund Managers. They are responsible for providing various services to the Investors and the Fund Managers like keeping the record of the details of each investor, paying out of the benefits like dividends to the eligible investors, sending account statements to the investors, updating the invertors details, etc.
In short, The RTA’s provide the investor details to the Fund Managers and deliver the Fund benefits to the investors.
For example, Computer Age Management Services (CAMS) is the RTA of HDFC Mutual Fund House.
Well, from the name itself we can understand that the Auditors are responsible for auditing the financial reports/accounts and annual report of the Mutual Fund scheme. An independent auditor is appointed by the AMC to evaluate the books of accounts so that transparency is maintained.
Brokers are appointed by the Mutual Fund House to attract investors and to spread the Fund widely. The Brokers help the investors to buy or sell the units of the Mutual Fund scheme. It is through the brokers that you can buy or sell the units of the scheme. The brokers also provide you with advice regarding the Funds or schemes.
The Mutual Fund structure in India is effective and regulated by SEBI. Each member in the structure has their own specific defined functions and responsibilities. So, you as an investor don’t have to worry about the regulations and functioning of the Mutual Funds in India.
Though still, some might feel whether investing in Mutual Funds is safe or not, so to answer this question of yours, you can check out this article Are Mutual Fund a safe investment?.
But, is it enough to make sensible investments? No, as you should do your research on how to select the most suitable fund for you, the types available, etc. After all the Fund you choose should help you fulfill the objectives for which you are investing.
Currently, there are three main components of a Mutual Fund structure named Sponsors, Trustees, and AMC. And few other components like Custodian, RTA, Auditors, and Brokers.
A person or a group of person who starts a Mutual Fund is known as the sponsor of the Fund. It is similar to the promotors of the company.
It is the Asset Management Company (AMC) who appoints the Fund Manager, who is responsible for managing the portfolio of the scheme.