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Mutual Fund: Concept, Role Of Asset Management, Company Trustee, Financial Manager, Structure

Concept of mutual funds in India

The name itself suggests that a 'Mutual fund' is like an investment channel that helps several investors to combine their resources to purchase stocks, bonds, and other securities for their earnings.

These combined funds which are referred to as Assets under Management (AUM) are then invested in a mutual fund company's manager who has expertise in it. The mutual fund company is called as an Asset Management Company (AMC).

This combined underlying holding of the fund is called the 'portfolio' and each investor owns some portion of this portfolio and this portion which the person holds is in the form of units.
  • Mutual Fund is like a financial vehicle that consists of all the money collected from different investors in securities such as stocks, bonds, and assets.
  • It is operated by money managers who allocate the fund's assets and produce income for the fund's investors.
  • It gives investors access to diversified portfolios at a low price.
  • It is divided into several kinds of categories on the basis of investment objectives, kinds of securities they invest in, and the type of return they are expecting.
  • It charges annual fees known as expense ratio or in some cases commissions.

Role Of Asset Management In Mutual Fund

AMC is responsible for receiving funds from various clients and putting these funds to schemes to get better returns.

AMCs are responsible for the entire operation of the Mutual Fund. The objective starts right from making the financial goal for a fund, followed by selecting the asset class whether debt, equity or any other financial assets are to be included, followed by the selection of stocks, debt based bonds, real estate, etc. These are the people who are also responsible for monitoring, adjusting, rebalancing of portfolio and many such tactical moves a fund has to do for meeting its pre-decided investment goals.

Roles of Asset Management Company

We investor invest in an AMC, in accordance with the portfolio they offer with a defined investment rationale and philosophy. As mentioned, an appointed asset manager would make decisions and other tactical moves like re-balancing, selection to benefit the investors.

In a broad sense they manage the portfolio by playing the following rules:
  1. Research and Analysis
    Portfolio construction requires in depth analysis of which asset class to pick depending on the prevailing market condition. Analysts in an AMC would conduct in-depth market analysis both from micro and macro level perspective.
  2. Portfolio Construction
    The portfolio construction is done by defining the investment objective or rationale. The main aim of a fund manager is to generate more returns than the benchmark. The fund managers would take the market findings of AMC's analyst and would start crafting a fund scheme.
  3. Asset Allocation
    At this stage, the mutual fund objective is fixed. Now the asset has to be allocated based on the investment rationale, like for deb based fund not more than 20% to be allocated in equities, etc. Post the broad asset class allocation, the process now boils down to selecting real assets like for equity based � growth fund, which all growth stocks to fit in large cap so that desired return can be achieved.
  4. Performance Review
    The AMC would continuously monitor the performance of the fund scheme. As it is essential to be a better performer than the competitors in the market.
  5. Tactical Rebalancing
    Markets are not stable at any instant of time, hence if a stock has been allotted say 10% of the fund and the stock is not performing well, there has to be a re-allocation of funds to a better performing stock. This is a very crucial process and this defines the expertise a fund manager has.

An AMC is under the supervision of the board of trustees. AMC's are also regulated by the Securities and Exchange Board of India (SEBI). There is another regulating body for AMC called Association of Mutual Funds in India (AMFI). Every AMC has to comply with the rules and risk management guidelines set by both SEBI and AMFI.

Top AMCs in India

An Asset Management Company offers investors with different mutual fund schemes to invest. They manage the money received from the investors by investing in different asset classes. So how, should they be judged is the real question any investors may have?

Following are the parameters on which AMCs are generally rated upon:
  1. Reputation of AMC
  2. Fund Managers Credentials

Company Trustee And Financial Manager Under Mutual Funds

The role of a trustee becomes critical because the mutual fund, sponsored by the AMC, actually holds money in trust on behalf of millions of investors. The trustees will ensure that the funds are actually managed in the interests of the shareholders. While the trustees will not get into the day to day management of the funds, they will set broad guidelines and compliance check points to ensure that the interests of the small investors are protected. Effectively, the trustee will spell out the responsibilities of the AMC, monitor any new scheme that is introduced and ensure full compliance with all regulatory guidelines.

Key functions played by a mutual fund trustee

While the functions of a mutual fund trustee are defined very broadly and are actually all- encompassing, some of the key functions that the trustee is expected to discharge are as under:

The role of a trustee becomes critical because the mutual fund, sponsored by the AMC, actually holds money in trust on behalf of millions of investors. The trustees will ensure that the funds are actually managed in the interests of the shareholders. While the trustees will not get into the day to day management of the funds, they will set broad guidelines and compliance check points to ensure that the interests of the small investors are protected. Effectively, the trustee will spell out the responsibilities of the AMC, monitor any new scheme that is introduced and ensure full compliance with all regulatory guidelines.

Every mutual fund must have a minimum of 4 trustees or they can appoint a trustee company with minimum of 4 directors. Two-thirds of the trustees will have to be independent. Also, trustees cannot be appointed from within the same group to which the AMC belongs. The Board of Trustees is appointed by the AMC and is subject to the approval of SEBI.

A big role that the trustee plays is in putting internal controls in place and demarcates the "maker/checker" roles. This includes the preparation and review of the compliance manual of the fund, design of internal control mechanisms, putting in place internal audit systems etc.

Mutual funds need to appoint brokers and distributors to sell their products and here trustees have to ensure that the process is fool proof. The board of trustees will specify norms for empanelment of brokers and franchisees. It will also lay down norms for broker screening, monitoring securities transactions with brokers and avoiding disproportionate business to a handful of brokers.

The trustee is the custodian of the trust of millions of mutual fund investors. Therefore, their responsibility is a fiduciary responsibility. In the interests of the investors, the trustees need to ensure that the assets of the fund are fairly valued (both debt and equity), there is a clear methodology for valuing illiquid securities and that proxy voting is done fairly.

In India, the structure of Mutual Funds is a three-tier structure with a few other significant components. It is not just the different banks or AMCs that create or float different mutual fund schemes; instead, there are other players that are involved in the structure of mutual funds. The primary watchdog in all these transactions is the Securities Exchange Board of India ('SEBI') under whom each entity is required to be registered with. The inception of SEBI (Mutual Funds) Regulations, 1996, revolutionized the structure of mutual funds and since then all the

entities are regulated under it. Currently, mutual funds comprise of five basic participants, namely a Sponsor, Mutual Fund Trustee, Asset Management Company, Custodian & Registrar and a Transfer Agent.

A sponsor is any person or entity that can set up a mutual fund scheme to generate income through fund management. The sponsor can be said as the first layer of the three-tier structure of mutual funds in India. The sponsor is required to approach SEBI and get a mutual fund scheme approved. The sponsor cannot work alone. It needs to create a Public Trust under the Indian Trust Act 1882 and get the same registered with SEBI.

Once the trust is created, the Trustee is registered with SEBI and is appointed as the trustee of the fund in order to safeguard the interest of the unit holders and to adhere the SEBI Mutual Fund regulations. The Sponsor subsequently creates an Asset Management Company under the Companies Act, 1956 to deal with the fund management.

There are certain eligibility criteria to become a Sponsor, as prescribed under:
  1. The Sponsor must have profit in 3 of the last 5 years including immediately preceding year. b. The Sponsor must have a minimum of 5 years of experience in financial services.
  2. The net worth of the Sponsor must be positive for all the preceding five years.
  3. Out of the total net worth of the AMC, 40% must be participated by the Sponsor.
As seen above, the position of a Sponsor is crucial and they should have high credibility. Strict norms show that the sponsor must have enough liquidity and faithfulness to return the money of an innocent investor, in case of a financial meltdown.

Trust and Trustees

Trust and trustees make up the second layer of the structure of mutual funds. Trustees are also known as the protectors of the fund and are employed by the fund sponsor. As the name suggests, they have a very important role in maintaining the trust of the investors and to oversee the growth of the fund. SEBI mandates the trustees to provide a report on the fund and the functioning of the AMC on a half-yearly basis. Trustees can be created either in the form of Board of Trustees or a Trust Company. The Trustees supervise the entire functioning of the

AMC and regulate the operations of the mutual fund schemes. The SEBI has tightened the rule of transparency so as to avoid any conflict of interest between the Sponsor and the AMC. Without the permission and approval of the Trust, an AMC cannot float a new mutual fund scheme. It is important for the Trustees to act independently and take appropriate measures to safeguard the hard earned money of the investors. The Trustees are also required to be registered under SEBI, and SEBI further regulates their registration by either suspending or revoking the registration if found breaching any conditions.

Asset Management Company

An AMC is the third working layer in the structure of mutual funds. An AMC floats various schemes of mutual fund in the market, pursuant to the needs of the investors and the nature of the market. They create mutual funds along with the trustee and the sponsor and then oversee its development. While creating the scheme, they take help of bankers, brokers, RTAs auditors etc. and enter into an agreement with them. An AMC is a company formed under Companies Act and needs to be registered under SEBI. Similar to the Trustees, an AMC also needs to ensure that there is no conflict of interest amongst them, the sponsor and the trustees.

Other Participants In The Structure Of Mutual Funds


A Custodian is an entity, which is responsible for the safekeeping of the securities. Custodians are registered with SEBI and are responsible for the transfer and delivery of units and securities. Custodians also enable investors in updating their holdings at a particular point of time and help them in keeping track of their investments. Along with the primary job of safekeeping, custodians are also in charge of the collection of corporate benefits such as bonus issue, interest, dividends etc.

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