Mutual Fund Unlocked: How mutual funds work?

There are many people who are new to mutual funds or have very little information about it. For them mutual fund is a pool of money which is invested in the market by the fund manager. But many of them are not aware as to how does a mutual fund work.


Mutual Funds Structure in India


Sponsor

The sponsor is that entity who promotes the mutual fund. They are the ones who initiate the launch of the mutual fund. As per SEBI, a sponsor must have a goodwill, required professional competence and are financially sound along with a minimum of 5 years of experience in the financial services industry and must contribute 40 per cent of the AMC’s (Asset Management Company) networth. Sponsor is not liable for any loss from the operation of a mutual fund scheme beyond the initial contribution made towards setting up the mutual fund.

Trustee

The mutual fund should be created as a public trust and must get registered with SEBI. The sponsor will need to appoint trustees to look after the trust. Mutual fund properties and assets are owned by them. The role of a trustee is only to regulate the mutual fund and they don’t manage the day-to-day affairs of the mutual funds. Trust acts as a protector of the unit-holders' interests. As per SEBI, minimum two-thirds of the directors of the trust must be independent directors, who in any manner are not associated with the sponsors.

AMC (Asset Management Company)

Asset Management Company is that entity which manages the money of the investors and takes investment decisions regarding the same. Trustees appoint AMC. AMC manages the fund and charges fees for the same which is to be borne by the investor, known as the expense ratio. As per SEBI, AMC can’t buy more than 5% of the securities from the same broker.

Custodian

When the fund manager buys and sell securities it is not in the custody of AMC rather it is in the custody of the custodian. Custodian has the access to the securities and also needs to get registered with SEBI. AMC can have more than one custodian for various kind of securities. As per SEBI, sponsor and custodian must be separate entities.

Registrar and Transfer Agents (RTA)

Registrar and Transfer Agents (RTA) are the entities which carry out the work like processing of applications, processing of the KYC, issuing unit certificates, processing redemption orders, etc. RTA are appointed by the AMC. RTA charge a service fee for the work done by them.