MUTUAL FUND STRUCTURE AND CONSTITUENTS

Mutual Fund Structure and Constituents (Part 1)

• Definition: A mutual fund is a financial vehicle that pools money from investors to invest in a variety of assets, such as stocks, bonds, and commodities.
• Structure: Mutual funds can be structured as a company or a trust, with investors holding shares or being beneficiaries of the trust.

Key Constituents of a Mutual Fund

• Sponsors: The promoter of a mutual fund, responsible for setting up the trust and asset management company (AMC), appointing the custodian, board of trustees, and board of directors of the AMC.
• Trustees: Appointed by the sponsor, trustees act on behalf of investors, protecting their interests and managing the mutual fund's assets.
• Asset Management Company (AMC): The investment manager of the mutual fund, responsible for managing the funds contributed by investors.
• Custodians: Hold the securities or assets of the mutual fund, responsible for their safekeeping and settlement of transactions.

Roles and Responsibilities

• Sponsor:
  • Contributes at least 40% of the net worth of the AMC
  • Ensures a good financial track record with positive net worth
  • Seeks regulatory approval from SEBI
• Trustees:
  • Protect the unit holders' interests
  • Manage the mutual fund's assets
  • Submit Half Yearly Trustee Reports (HYTR) to SEBI
• AMC:
  • Manages the funds contributed by investors
  • Sets up offices, employs staff, creates and markets products
  • Submits quarterly reports to trustees and SEBI
• Custodians:
  • Hold the securities or assets of the mutual fund
  • Settle transactions and track corporate actions
  • Offer fund accounting and valuation services

Regulation of Mutual Funds

• SEBI (Mutual Funds) Regulations, 1996: Regulates the activities of mutual funds, including registration, management, products, investments, accounting, valuation, investor services, and investor protection.
• Key Aspects:
  • Mutual funds must obtain SEBI approval before setting up their business
  • AMCs must be registered with SEBI before getting into investment management
  • Mutual funds must submit periodic reports and are subject to SEBI inspection and audit

Other Constituents and Service Providers

• Distributors: Appointed by AMCs to sell their products
• Registrar and Transfer Agents: Responsible for maintaining investor records and facilitating transactions
• Depositories: Hold securities in electronic form, facilitating trading and settlement
• Digital Platforms and Payment Aggregators: Facilitate online transactions and payments for mutual fund investments

Mutual Fund Structure and Constituents (Part 2)

• Definition: Mutual fund constituents, except custodians, are appointed by the Asset Management Company (AMC) with the approval of the trustees. All constituents must be registered with the Securities and Exchange Board of India (SEBI) and are paid fees for their services.
• Details: The various constituents and their roles are listed in Table 9.1, which includes:
  • Custodian: Holds funds and securities
  • R&T Agent: Maintains investors' records and services investors' requests
  • Banks: Enable collection and payment
  • Auditor: Audits scheme accounts
  • Distributors: Distribute fund products to investors
  • Brokers: Execute transactions in securities

Key Constituents and Their Roles

• Registrar and Transfer Agents (R&T Agents): Provide services to investors, accept and process investor transactions, and operate investor service centers.
• Depositories and Depository Participants: Allow unit holders to hold mutual fund units in a statement of account or in their demat accounts.
• Banks: Provide collection and payment services to mutual funds.
• Fund Accountant: Responsible for calculating the Asset Under Management (AUM), Net Asset Value (NAV), and determining applicable Total Expense Ratio (TER) and commissions.
• Auditor: Audits the books of the mutual fund.
• Brokers: Execute buy and sell transactions of the fund managers.
• Distributors and Registered Investment Advisers: Distributors sell mutual fund products to investors, while Registered Investment Advisers provide neutral advice to clients.

Additional Platforms and Services

• Stock Exchange Platform and other Digital Platforms: Allow investors to buy and sell mutual fund units, providing a wider reach and convenience.
• MF Utility (MFU): A shared services initiative that acts as a transaction aggregation portal, enabling investors to transact in multiple schemes across mutual funds.
• MF Central: A unified platform that allows investors to access portfolio/account statements, place service requests, and execute financial transactions.
• Payment Aggregator and Payment Gateway: Facilitate online payment transactions for mutual funds.