Role and supervision of Mutual Funds in the Capital Market

A mutual fund is a vehicle to mobilize money from multiple investors and invest the money in various types of securities to give the investors the benefit of growth, wealth creation, stability, regular income, liquidity, or a mix of all. The objective of every mutual fund is clearly defined in the memorandum of the fund and the trustee ensures that the fund adheres to the core principles laid out in the memorandum.  Accordingly, the fund invests in different types of securities in varied proportions based on their asset allocation model. These securities may be equities, bonds, short-term money market liquid instruments, etc.

Concept of mutual funds:

The concept of mutual funds is based on the twin ideas of diversification of risk and professional management. Direct equity investing is limited by the size of the corpus. By investing in a mutual fund, an investor gets access to markets that may otherwise be unavailable to them and avail of the professional fund management services offered by an asset management company. Today, Mutual Funds have become a key investment vehicle for the Indian capital market with an AUM (Asset under Management) of Rs. 2600000 crore and an equity AUM of nearly 1/3rd of the total corpus.

Roles of mutual funds:

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.

Supervision of Mutual Funds:

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.

Conclusion:

The growth of an economy very much depends upon the extent of promoting investments in the corporate sector. A mutual fund is a financial intermediary in the capital market that pools collective investments in the form of units from retail and corporate investors and maintains a portfolio of various schemes invest that in collective investments in equity and debt instruments on behalf of these investors. Thus, the savings of the investors or the public are mobilized as a large corpus and are used for productive purposes of the corporates. Hence the Mutual Funds act as a link between the public and the capital market having a significant role in channeling savings into the capital market. The money pooled by the Mutual Funds is invested in the money market debt market and capital market instruments such as shares &debentures.

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Also Read: Alternative Investment Funds

Also Read: Alternative Investment Funds