Management structure and Functions of Mutual Funds

Mutual funds are constituted as Trusts and are governed by the Indian Trusts Act, of 1882.

The structure of mutual funds in India includes three tiers: sponsors, trustees, and asset management companies (AMCs).

Sponsor: The sponsor acts as a promoter, who brings the initial capital for the mutual funds business akin to that of a company. Sponsors apply to SEBI for registration of a mutual fund and subsequently, they invest in the capital of the AMC. The sponsor should have a sound track record and reputation of fairness and integrity in all business transactions and should be in financial services for a minimum of 5 years. Their operations should be profitable and the sponsor should have a positive net worth. The sponsor should be a fit and proper person as defined by the law. Sponsor must contribute a minimum of 40% of the net worth of the AMC.

Trust: The trust is established by a sponsor or more than one sponsor who is like a promoter of a company. The trustees of the mutual fund hold its assets for the benefit of the unit holders under the approval and oversight of SEBI (Securities and Exchange Board of India). The role of protecting the interests of the beneficiaries (investors) is that of the Trustees and is governed by the Trust Deed. The role of trusteeship is performed through a duly constituted board of trustees. Trustees are required to track investor complaints and make sure that they are addressed.

Asset Management Companies (AMCs): The AMC is appointed by the sponsor or the Trustees. An Asset Management Company (AMC) is a financial institution that manages and oversees the operations of mutual funds and other investment vehicles. These companies play a pivotal role in the investment industry by creating and administering various fund products to meet the diverse financial goals of investors. Prior approval of the trustees is required for appointment as a director on the board of the AMC. In addition, at least 50% of directors should be independent directors. The AMC must have a minimum net worth of Rs. 50 crore.

Custodian: Custody of the assets of the scheme (equity, bonds, structures, gold, etc. rests with the duly appointed Custodian. The custodians are also appointed by the Trustees. The custodian must accept and give delivery of securities for the purchase and sale transactions of the various schemes of the fund. These custodians are registered with SEBI. They interface with brokers, AMC, registrars, depository participants, and the regulator.

NAV: NAV stands for Net Asset Value. The performance of a mutual fund scheme is denoted by its NAV per unit.

Net Asset Value is calculated as the Net Asset of the Scheme / Outstanding Units.

For example: NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on a given date. For example, if the market value of securities of a mutual fund scheme is ₹1500 lakh and the mutual fund has issued 100 lakh units of ₹ 10 each to the investors, then the NAV per unit of the fund is ₹ 15 (i.e., ₹1500 lakh/100 lakh).

Since the market value of securities changes every day, the NAV of a scheme also varies on a day-to-day basis.

NAVs of mutual fund schemes are published on respective mutual funds’ websites as well as AMFI’s website daily.

Mutual funds perform different roles for the different constituents that participate in it. Here are some of the important roles played by them.

The primary role of mutual funds is to invest in securities that can increase in value over time, leading to capital gains for investors. Further, they can target needs like wealth creation, regular income, liquidity, tax efficiency, macro defence, etc. Also, they should be able to give inflation-beat returns over time.

The money raised from investors helps the capital markets to get quality inflows through Mutual Funds., The investors earn wealth from capital market gains and the market overall benefits from the surge in the equity cult among the investors.

Secondly, Mutual funds also help companies raise funds through debt by investing in their debt instruments. This facilitates capital allocation and ensures that productive projects can get funds.

Thirdly, mutual fund managers constantly monitor the operations of the investee company, compared to individual investors due to their networks, size, and market intelligence. Active mutual funds can conduct more effective monitoring when compared with passive mutual funds. It is also reported that short-term mutual funds are more significant than long-term mutual funds in monitoring. The Securities and Exchange Board of India (SEBI) put out a circular on December 24, 2020, asking mutual funds and all categories of AIFs to “shoulder greater responsibility” by monitoring their investee companies to protect the interest of the investors.

Management and supervision:

Mutual funds are managed by full-time, professional fund managers who have the expertise, experience, and resources to actively buy, sell, and manage investments. A fund manager continuously monitors investments and rebalances the portfolio accordingly to meet the scheme’s objectives.

The Securities and Exchange Board of India (SEBI) formulates policies and regulates and supervises mutual funds to protect the interests of the investors.

The regulatory framework established by SEBI addresses several mutual fund-related issues, including the distribution of funds and client complaints, investment objectives, investment methods, disclosure standards, asset valuation, and appointment of asset management firms (AMCs). SEBI routinely monitors and oversees mutual funds to guarantee compliance with its rules. SEBI also takes the necessary steps to protect the interests of the investors. The authority makes sure to maintain the openness of the market.

Read other Mutual Funds Related Posts:

Also Read: Alternative Investment Funds