A mutual fund’s structure is three-tiered, and it starts with the setting up of a trust, which includes a sponsor, trustees, and an AMC. The sponsor(s) of a trust works like a promoter of any company. The trustees who form part of the trust hold the property of the mutual funds for the unit holders with the approval of SEBI (Securities and Exchange Board of India).
Any mutual fund will first start by pooling money from various investors, and this money is then invested in securities as per the pre-specified objectives of the fund. The benefit or return earned on these securities is distributed to each investor after AMC deducts the expenses.
How the mutual fund industry generally works
A mutual fund is an organisation or company where people like you and me come together, give your money to the organisation to manage it with the objective stated in the offer document (agreement). These organisations invest into various asset classes like equities, bonds, money market instruments, and other securities.
The structure of a fund starts with the execution of a trust deed by the sponsor to create a mutual fund trust, which is followed by an AMC that helps manage the trust’s securities and launches the scheme wherein the securities are kept safely with the custodians. Any mutual funds have to register themselves with the Indian Trust Act, 1882. They’re not registered as a company. The following is the structure of a mutual fund:
Sponsor: The person or company who starts a Mutual Fund. According to SEBI, a sponsor is a person who can start a mutual fund alone or in combination with another entity. They have the right to form a trust, appoint the board of trustees, and then appoint the AMC or a fund manager. For example, HDFC Mutual Fund was started by HDFC Bank and Standard Life Investments.
Trust and Trustee: They are the group of persons or companies whose board of directors look after the mutual fund whether that mutual fund is doing any illegal activities or not, having proper allocation or not, etc. like, HDFC Trustee Company Ltd. is a trustee for HDFC Mutual Fund. The trustee does not look into the matter of day-to-day activities. They can be seen as primary guardians of funds and assets.
Asset Management Company (AMC): The asset management company acts as the fund manager or as an investment manager for the trust. A small fee is paid to the AMC for managing the fund. The AMC is responsible for all the fund-related activities. The AMC is bound to manage funds and provide services to the investor. For example, HDFC Asset Management Company.
Custodian: A custodian is responsible for the safekeeping of the securities of the mutual fund. They manage the investment account of the mutual fund and ensure the delivery and transfer of the securities. They also collect and track the dividends and interests received on the mutual fund investment. There are multiple custodians also. For example, HDFC AMC has 3 custodians i.e. HDFC Bank, CitiBank and Deutsche Bank.
Registrar and Transfer Agents (RTA): The main function of RTA is to safeguard the investors, like if you don’t get a dividend or anything which is declared by the mutual fund, you can contract the RTA. It is stated in the Statement of Additional Information (SAI). For example, CAMS is the Registrar and Transfer Agents for HDFC Mutual Fund.
Auditor: Auditors keep the record books of accounts and annual reports of various schemes. Each AMC hires an independent auditor to analyse the books so as to keep their transparency and integrity intact. For example, M/s B S R & Co. LLP CA is the auditor of HDFC Mutual Fund.
Broker: A broker is an entity or individual that attracts new investors to invest in a particular mutual fund. They will keep track of the market, generate reports, and advise AMC to invest in particular securities. They will hold a licence from the SEBI to operate the investor’s trading accounts. They act as an intermediary between the investors and the mutual fund houses.
Dealers: The dealers help the AMC to successfully place the deal in the capital and money market instruments, and they have to fulfil all the formalities of purchase and sale through brokers.
Intermediaries or distributors: The intermediary can be anyone, be it agents, bankers, distributors, etc. They will act as an intermediary between the retail investors and AMC. They recommend the stock to investors and, in return, get a commission from the AMC.
Banker: Bankers are also an important participant, who act as collecting agents on behalf of the fund managers. HDFC Bank Ltd. is the banker of HDFC Mutual Fund.
The structure of mutual funds in India is three-tiered: the first is the sponsor, the second is the trust and trustee, and the third is the asset management company. These are the participants who play a key role in the management of mutual funds. Each participant has their individual role to play. However, their functions are interlinked with each other. Mutual fund regulations are the bible by which all the participants are bound together, to perform their functions more diligently and without prejudice to the interest of the investors.
Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited