Structure of Mutual Funds

Peter, Content Writer | Friday, 10 February 2023

There were days when all of us used to think that investing in the share market was only for the big-time investors who could afford to indulge in large investments. That's not the case today - why is it different now? Well, thanks to - MUTUAL FUNDs and MUTUAL FUND HOUSES, we do not have to wait until we have a lump sum of money or a high-risk appetite. If you are still someone holding back from investing in the share market - don't think you should hold back anymore. You've got mutual funds. But, in order to get started with mutual funds, you would have to know how it works.

First things First, let's start from the bottom.

What Actually are Mutual Funds?
A mutual fund is known as a type of investment instrument that combines investor funds and invests them in stocks, bonds, government securities, gold, and other assets.

Companies that meet the requirements to establish mutual funds form Asset Management Companies (AMCs) or Fund Houses, which pool investor funds, market mutual funds, manage investments, and facilitate investor transactions.

Mutual funds are managed entirely by fund managers, who are competent financial professionals with experience in analyzing and managing investments. The monies collected from mutual fund investors are invested in various financial assets such as stocks, bonds, and other assets, as stated by the fund's investment objective. Among many other obligations, fund managers are responsible for deciding where and when to invest.

The AMC charges the investor a fee known as the expense ratio for the management of the fund. It is not a set charge and varies from mutual fund to mutual fund. The maximum expense ratio that can be charged on the basis of the fund's total assets has been determined by SEBI.

In India, the capital markets regulator SEBI (Securities and Exchange Board of India) has aided the mutual fund business by establishing a framework that benefits all stakeholders, including investors and mutual fund sponsors. Regulations are enacted on a regular basis to improve functioning, attract investments, and productivity growth.

So, for instance, if you have to be part owner of Axis Bank - but have so many other attributes in mind. You don't have to. You can just choose to buy an Axis Bank mutual fund. It has so much less risk and is much more affordable.

Before you can start investing, though, let's look at the whole picture.

What is the Structure of a Mutual Fund?

a) Fund Sponsor
The fund sponsor is the first part in the three-tier mutual fund structure in India.

A sponsor is any individual or business that can establish a mutual fund in order to earn money through fund administration. Fund management can be accomplished through the use of an associate firm that manages the fund's investment. In addition, the sponsor might act as a promoter for the affiliate company.

To establish a mutual fund, the sponsor must apply to SEBI. A sponsor, on the other hand, cannot work alone. It must establish a Public Trust in accordance with the Indian Trust Act of 1882 and register it with SEBI. Trustees are registered with SEBI after the Trust is established.

The trustees are appointed in order to manage the Trust, defend the interests of unit holders, and comply with SEBI Mutual Fund Regulations. Following that, the sponsor establishes the asset management firm under the Company Act of 1956 in order to regulate fund management. The sponsor is the major entity in charge of promoting the mutual fund firm and regulating public funds.

b) Trust and Trustees
The second part of the mutual fund structure is trust and trustees, sometimes known as fund protectors. They are employed by the fund's sponsor. They are also critical in sustaining investor trust and tracking the fund's growth.

Through an agreement known as the trust deed, the fund sponsor establishes a trust in favor of trustees. The Trust is managed by Trustees. They are also the key stewards of finances and assets. A Trustee Company or Board of Trustees can be founded to form trustees. Furthermore, the trustees oversee the AMC's operations and ensure compliance with SEBI (Mutual Funds) Regulations. In other words, they keep an eye on the AMC's systems, procedures, and general performance.

SEBI requires trustees to provide the fund report and AMC operation on a semi-annual basis. In addition, SEBI has strengthened rule transparency to avoid conflicts of interest between the Sponsor and AMC. Furthermore, AMC cannot launch a new fund into the market without the Trust's consent.

As a result, trustees must act independently and take proper action to protect investors' funds. Trustees must also be registered with SEBI, and SEBI supervises their registration by revoking or suspending it if any requirement is violated.

c) AMC
The third tier of the mutual fund structure is Asset Management Companies (AMCs). It is registered with SEBI and incorporated under the Companies Act. The AMC issues several mutual fund schemes based on the needs of the client and the nature of the market. It also serves as the Trust's fund manager or investment manager.

Furthermore, the AMC is in charge of all fund-related activities, including the introduction and management of the program. As a result, an AMC must manage funds and provide services to its investors.

The AMC establishes and manages mutual funds in collaboration with trustees and sponsors. They enlist the assistance of bankers, brokers, RTAs, transfer agents, and others in the development of the scheme and sign an agreement with them. AMC, like the trustees, must guarantee that there are no conflicts of interest and that specific constraints are placed on business activity.

There are several other participants in the mutual fund structure, such as:
● Custodian
● Registrar and Transfer Agent (RTA)
● Auditor
● Broker
● Intermediaries

Conclusion
These are the participants who now play critical roles in the management of mutual funds. Each of them is responsible for and plays a specific role. Nonetheless, their functionality remains inextricably intertwined. The Mutual Funds' three-tier structure was designed with the fiduciary role of the Mutual Funds in mind. It ensures that each system component operates independently and efficiently.