Structure of Mutual Funds in India

We have seen many aspects of mutual funds, whether it was about their performance, portfolio, how to choose them and how to compare them. In this post, we will see the structure of mutual funds in India. Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI). As running of a mutual fund involves managing of investors’ money, SEBI prescribes a complete set of guidelines for operating the mutual fund (MF) through the “SEBI MF regulations 1996”. These regulations designate that a mutual fund must be a three-tired structure consisting of:

  1. A Sponsor
  2. A Trustee
  3. An asset management company (AMC)

While the above-mentioned play the most vital roles in creating and running a fund house, registrar and transfer agent (RTA), the custodian, the auditors and the fund accountants play an important supporting role in helping the smooth functioning of the mutual fund.

Sponsor –

The Sponsor, is the main body that establishes the Mutual Funds. The Sponsor can be correlated to a promoter of a company. The duty of the sponsor involves appointing the trustees with the consent of SEBI and setting up an Asset Management Company under the Companies Act 1956 while making the trust registered with SEBI. As the Sponsors play the most vital role in the functioning of a mutual fund, SEBI has a set of stringent guidelines for the eligibility of a sponsor. Some of them are as follows: the sponsor should have a good track record of conducting business in the financial services field for not less than 5-7 years. A Sponsor also needs to have made profits in at least 3 of the 5 years including the latest year.

During the same period, it is also essential that the sponsor has had a positive net value. It should be contributing at least of 40 percent net worth of the AMC. It is also important that the sponsor has a good track record of fairness and integrity in all its transactions. For example, ICICI Bank and Prudential Plc are sponsors for ICICI Mutual Fund. For Birla Sun Life Mutual Fund, Aditya Birla Financial Services and Sun Life (India) AMC Investments Inc. are sponsors.

Structure of Mutual Funds

Mutual Fund Structure

Trustee –

In the structure of mutual funds, the foremost role of a trustee is to secure that the interest of the unit holders is shielded while making sure that the mutual fund complies with all the regulations of SEBI. Either, the sponsor should select four trustees or establish a trustee company with at least four independent directors. Additionally, at least two-thirds of the trustees or the directors should be independent not associated with the sponsor in any way.

Some of the important responsibilities of the trustees involve entering into an investment management contract with the AMC to define its functioning. Trustees are also accountable for ensuring that the AMC has all the necessary procedures, processes, and systems in place while ensuring that all the key persons such as the CIO, CEO, the fund managers and the analysts are selected after the due care. All the schemes launched by the AMC have to be approved by the trustees before launch. The trustees also review all the transactions of the AMC on a quarterly basis whilst filing reports to SEBI, generally on a half yearly basis.

See – How to Choose the Best Mutual Fund On Your Own

Asset Management Company (AMC) –

AMC’s are the investment manager of the trust. They take care of the everyday operation of the mutual fund and managing the investor’s money as well. The AMC is appointed either by the Sponsor or the Trustee after getting the approval of SEBI. The Asset Management Company consists of the Chief Investment Officer, analytics, and the fund managers, who are together responsible for managing the different schemes started. The compliance officer makes sure compliance of all the actions of the AMC are in line with SEBIs laws and regulations. For example; Axis AMC is the Asset Management Company for Axis Mutual Fund.

Custodian –

He has the custody of the all the shares and numerous other securities purchased by the AMC. The custodian is responsible for safe custody of all the securities. The custodian is accountable for managing the investment account of the mutual fund.

Registrar and Transfer Agent (RTA) –

It maintains and updates all the investor’s records. The primary function is investor servicing through its office and many other branches. Its functions involve processing of investor application, purchase and redemption transaction history by investors in different fund schemes and plans.

Auditors –

The auditors are responsible for the auditing of the AMC’s accounts while assuring that the accounts of schemes are maintained autonomously from that of AMC. The fund accountants are liable for calculating the NAV of the schemes based on the information about the assets and liabilities of every scheme.

Structure of Mutual Funds

Example of Axis Mutual Fund Structure

See above image for the exact example of Axis mutual fund structure. Here you will get all information related to your mutual fund asset management company.

Bottom Line –

Therefore we can note that the mutual funds in India are a well-regulated entity with a clearly defined structure including several components whose roles and responsibilities are correctly defined under the purview of SEBI.

The advantage of such a structure, especially the trust form, assures that nobody, other than the AMC or the sponsor can mishandle your money. In the case of a fund house closing down, your money is certainly returned to you. In other cases, where a fund house does not want to operate the business, it sells it’s business to another AMC and investors are given a choice to exit or to stay with the new AMC. Thus, while your money does undergo any market risks, there is no risk of losing money to the AMCs.

4 Replies

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  1. Jitendrasingh1214 says:

    Thanks for your marvelous posting! I really enjoyed reading it, you might be a great author.I will ensure that I bookmark your blog and will eventually come back in the future. I want to encourage you to definitely continue your great writing, have a great day!

  2. Vimlesh says:

    Very easy to understand. Thanks.

  3. Why there is the restriction for US citizens to invest in Indian mutual funds?

    • Ashu says:

      Hello Norah,
      Restrictions by AMCs on accepting investments from US persons are mainly because of two reasons-
      1. AMCs in India have not registered themselves with SEC and hence legally they cannot solicit money from US persons. This is the primary reason.
      2. FATCA – AMC need to maintain detailed documentation and report all the accounts to Indian tax authorities which will then forward it to the IRS, under India’s IGA on FATCA with USA which came into effect in July 2015. Hope this is clear.

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