Structure Of Mutual Funds

The structure of a mutual fund is designed to ensure that it operates transparently and in the best interests of the investors. The fund manager and AMC are regulated by the Securities and Exchange Board of India (SEBI), which sets rules and guidelines for the operation of mutual funds. All entities are regulated under the SEBI (Mutual Funds) Regulations, 1996. The board of trustees oversees the operations of the fund to ensure that it adheres to these guidelines and operates in the best interests of the investors.

Mutual funds broadly comprise five basic participants, namely a Sponsor, Mutual Fund Trustee, Asset Management Company(AMC), Custodian & Registrar and a Transfer Agent (RTA).

The structure of a mutual fund refers to its organization and the way it is managed. Here are the key components of the structure of a mutual fund:

• Sponsor The Fund Sponsor is any person or any entity that can set up a Mutual Fund to generate money by fund management. This fund management is done through an associate company that manages the investment of the fund. A sponsor is the promoter of the associate company. A sponsor approaches SEBI to seek permission for setting up a Mutual Fund. However, a sponsor cannot work alone. Once SEBI agrees to the proposal, a Public Trust is formed under the Indian Trust Act, 1882, and is registered with SEBI. Thereafter, trustees are registered with SEBI and appointed to manage the trust, protect the unit holder’s interest, and comply with the mutual fund regulations of SEBI. Subsequently, an asset management company is created by the sponsor that should be complying with the Companies Act, 1956 to regulate the management of funds. Eligibility criteria given by SEBI for the fund sponsor: The sponsor must have a minimum of five years of experience in financial services with a positive Net worth for all the previous five years. The net worth of the sponsor in the preceding year has to be greater than the Capital contribution of the AMC. The sponsor must have profits in at least three out of five years including the last year. The sponsor should have at least a 40% share in the net worth of the asset management company.
• The sponsor must have a minimum of five years of experience in financial services with a positive Net worth for all the previous five years.
• The net worth of the sponsor in the preceding year has to be greater than the Capital contribution of the AMC.
• The sponsor must have profits in at least three out of five years including the last year.
• The sponsor should have at least a 40% share in the net worth of the asset management company.
• Fund Manager The fund manager is responsible for making investment decisions on behalf of the mutual fund. They conduct research and analysis to identify potential investment opportunities and determine the best strategy to achieve the fund's investment objectives.
• Trust This is the second tier of the mutual fund structure. A mutual fund is set up as a trust, with a trustee responsible for ensuring that the fund operates in compliance with the trust deed and regulatory requirements. An AMC cannot launch a new mutual fund scheme without the approval of the trust.
• Asset Management Company (AMC) AMC is the third tier in the mutual fund structure. The AMC is the company responsible for managing the mutual fund. It hires the fund manager and provides administrative support to the fund. It launches various schemes suiting to need of diverse markets and investors.
• Board of Trustees The board of trustees is responsible for overseeing the operations of the mutual fund and ensuring that it operates in the best interests of the investors. They appoint the fund manager and monitor the performance of the fund. They have a crucial role in overseeing the growth of the fund as well as securing the trust of investors. Trustees are required to be registered under SEBI and SEBI further regulates their registration.
• Custodian The custodian is responsible for holding the securities owned by the mutual fund in safekeeping. They ensure that the securities are safe and secure and provide regular reports on the holdings. They are also registered with SEBI and are also responsible for the transfer and delivery of units and securities. In addition to their primary role of safekeeping, they are also in charge of other tasks such as bonus issues, interests, dividends, etc.
• Registrar and Transfer Agents (RTA) RTAs are an important link between fund managers and investors. They provide services such as updating fund managers with investor details and delivering the benefits of the fund to investors. They are SEBI-registered entities that process the applications of mutual funds, help with investor KYC, manage and deliver periodical statements of investments, update records of investors, and process investor requests. Some of RTAs in India are Link-in time, Karvy, etc.
• Distributors Distributors are intermediaries who help sell mutual fund units to investors. They are typically brokerage firms or financial advisors who receive a commission for selling mutual fund units.