Introduction
A mutual fund’s structure is divided into three stages, starting with creating an estate controlled by an AMC, trustees, and a sponsor. Trust sponsors, like business boosters, serve comparable functions. The trustees who comprise the trust control the mutual fund property on behalf of the unit holders under the authority of SEBI (Securities and Exchange Board of India).
Each mutual fund will first combine its different participants’ funds before investing in assets to meet the fund’s stated objectives. Each investor receives a share of the earnings or returns on these assets after AMC deducts its costs.
What are Mutual Funds?
An investment plan expertly managed by an asset management company is called a mutual fund. The asset management firm pools a group of investors’ funds into a single fund. It uses it to buy bonds, stocks, and securities.
Purchases made by investors might serve as a representation of their share of a mutual fund scheme. NAV (Net Asset Value), which is updated every day by the mutual fund house, is the basis for buying and selling units. Given the volatility nature of the market, the NAV fluctuates based on the mutual fund holding.
Registration of funds with SEBI is mandatory for all mutual fund houses. SEBI has set tight guidelines that mutual fund houses must abide by to safeguard the interests of every investor.
An investor can access a large portfolio of bonds, equities, and stocks through mutual funds, even with a little initial investment that would not be feasible otherwise. Mutual funds have gained recognition as smart investments that provide investors with beneficial returns over the past decade or so.
The Structure of Mutual Funds
Every mutual fund has a three-tiered structure by SEBI regulations. Additionally, fund houses must reveal the information in the paper about the program. Let’s concentrate on the three parts of this arrangement.
Level 1: Sponsor
The person or business that introduces the mutual fund is known as the sponsor or guarantor. By the Indian Trust Act of 1882, the sponsor establishes the mutual fund as a public trust. A trust is an organization set up to transfer property from one individual to another. When it comes to mutual funds, the fund’s purpose is to hold assets for its investors. However, it’s not a charity trust; the fund’s creator intends to profit when they establish it.
However, not everyone is suited for a role as a sponsor. The SEBI regulations establish specific entry requirements for sponsors of mutual funds. As to the guidelines, a sponsor must meet the following requirements:
- The sponsor needs to have at least five years of experience in the financial services sector.
- A rise in the sponsor’s wealth is required. A positive net worth indicates that the sponsor’s assets exceed their liabilities.
- The sponsor’s net worth cannot exceed the capital commitment made by the asset management firm (AMC).
- The sponsor must provide evidence of profits for the last three years, including the most recent fiscal year.
- The sponsor must own at least 40% of the AMC.
The promoter of a corporation is similar to a fund sponsor.
Level 2: The Board of Trustees
The sponsor of the mutual fund typically appoints several trustees. The sponsor also creates a trust on behalf of the trustees through a trust deed. These trustees are currently in charge of managing the trust.
- The performance of the fund is their responsibility.
- They have investors to answer and be accountable to.
- They serve as the fund’s delegates to the relevant authorities.
- They have to make sure the fund abides by SEBI rules.
- They are required to report on the operations of the funds to SEBI once every six months.
- The fund must be managed by qualified fund managers whom they appoint.
- They must hire a back office staff and set up the mutual fund office.
- They must select a supervisor or compliance officer to handle complaints and criticism from investors.
- The trustees must give the AMC permission to start a new fund.
- The SEBI Mutual Fund Rules and Regulations, the Companies Act, and the Indian Trust Act are a few requirements that the trustees must abide by.
Mutual fund structures are designed with various layers of accountability in mind. The trustees perform comparable duties to those of a company’s board of directors.
Additionally, SEBI has the following guidelines for who can be nominated as a trustee:
- A minimum of two-thirds of the trustees must be impartial and unaffiliated in any way with the sponsor.
- A minimum of four independent trustees are required to be on the board of trustees.
Level 3: Organization for Asset Management (AMC)
The fund manager, often known as the investment manager, is the AMC, and it bills for its services. The AMC handles the daily operations of the fund. Here are a few of its many uses:
- It can initiate new schemes while also terminating old ones.
- In addition to many other possibilities, it can determine which assets a particular plan will retain and the total expense ratio (TER).
- It is directly responsible for the fund’s performance. The fund manager is responsible for ensuring that investors obtain the maximum feasible profits from the fund.
- In addition to negotiating remuneration, it appoints auditors, registrars, share transfer agents, and custodians.
- It submits reports to the trustees.
- The AMC bears a significant amount of the obligation for investor education.
SEBI has stringent rules regarding an AMC’s business operations to prevent the misappropriation of investor funds. Here are a few of them:
- It is not permitted for an AMC to offer general management, advisory, or portfolio management services to other mutual funds.
- It is only permitted to invest in its mutual fund if the offer document specifically states otherwise.
- It is not permitted to serve as a trustee for another mutual fund.
Additional Organisations Within The Mutual Fund Ecosystem
The mutual fund ecosystem includes several different organizations in addition to the sponsor, trustees, and AMC. These organizations collaborate with the AMC to guarantee the seamless operation of mutual funds.
The Curator
The custodian manages the investments. He is in charge of all the shares and other securities that he has purchased. The custodian holds the securities that the corporation has purchased. The custodian is in charge of keeping the assets secure at all times and making sure the withdrawal is carried out under SEBI regulations.
Agent for Transfer and Registrar (RTA)
The Registrar and Transfer agents handle the distribution of dividends to investors as well as the management, upkeep, and updating of all investor- and investment-related records, including the processing of buy and redemption applications for fund shares. For their services, the transfer agent is paid a fee.
Merchants / Brokers
Brokers and dealers purchase the shares for the AMC and sell them on the stock exchange. Additionally, dealers provide the fund manager with insightful market outlooks and research reports.
Mutual Funds Determined by Investment Goal
Expanding Plans
Growth schemes are the best options for medium- to longer-term capital appreciation since they allocate assets to equity funds. The funds often yield large returns over the long run, but they carry a high degree of risk in the short term.
Revenue Plans
Income plans are ideal for investors looking for a steady return on their investment. The money allocated to the income plan is invested in relatively safer corporate and government bonds.
Equilibrium Fund Plans
Funds from balanced fund schemes are allocated equally between debt and equity assets. In balanced fund schemes, the investment’s risk-to-return ratio is balanced. For investors who wish to avoid playing it too safe with their money but don’t want to take on too much risk, balanced plans are great.
Schemes for the Money Market
Money market plans are designed to provide simple access to funds, income from the investment, and capital preservation. Typically, money market schemes make investments in short-term securities such as commercial paper, interbank money, and Treasury bills.
Mutual Fund: Geographically-Based
Funds for Equity
Stocks are one of the more popular mutual fund choices among regular investors. Investments made in company shares are referred to as equity. Although there is a big risk up front, the investment could eventually pay off spectacularly and benefit the investor.
Fixed-income funds and debt funds
Debt funds are the assets that are invested in graded debts, such as corporate bonds, government securities, debentures, and other money market instruments. When compared to stocks, these investments are less risky. For investors who wish to receive a consistent and reliable income from their mutual fund investments, debt funds are the best option.
Balanced funds and hybrid funds
These funds invest in both debt and equity to maintain a balance of risk in their portfolio. The objective of the fund is to give the investor both growth and consistent income. Mutual funds that are hybrid or balanced are the best options for investors who prefer to be cautious and not take on a lot of risk.
How Do Mutual Funds Work?
Using a combination of funds from small, large, and other institutional investors, mutual fund companies purchase many bonds or equities on the recommendation of a qualified investment advisor. The portfolio is managed by a fund manager, who could be an individual or a third-party organization acting on behalf of the investors.
The board of directors of a mutual fund business appoints a qualified fund manager to supervise and manage the stocks or bonds in the portfolio. The primary goal of the fund manager’s operations is to maximize growth and returns for investors in mutual funds.
A team of financial professionals, each with specialized knowledge in a particular area connected to mutual fund investments, such as determining the optimal moment to trade portfolio assets or monitoring fund performance, supports the fund manager.
These funds may be owned by certain fund managers and not by others. Fund managers gather the desired amount from investors and make their investment selections based on each investor’s individual risk tolerance and financial goals.
Conclusion
Mutual funds in India are a well-regulated industry with a well-defined structure consisting of multiple components, each with clearly defined functions and responsibilities as outlined in SEBI’s preview.
This type of agreement, especially the trust form, has the benefit of ensuring that only the sponsor and the AMC can misuse your money. In the unlikely event that a fund house closes, you will get your money back safely.
Investors are given the choice to depart or remain with the new AMC in a few different cases when an AMC sells out to a fund firm that no longer wishes to operate the business. Therefore, even though your money is exposed to market risks, there is no possibility of losing money to the AMCs.
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