The Mutual Funds in our country are managed by SEBI MF Regulations, founded in 1996. As per the guidelines laid out for mutual fund is shaped as a Public Trust, which comes under the Indian Trusts Act (1882). These guidelines insist on a three tiered configuration of individuals – investor, representatives, and fund managers for handling various purposes of a mutual fund, but put most of the accountability on the trustees.
Mutual Fund Structure are explained below:
The Fund Guarantor/ Sponsor – SEBI guidelines describe Guarantor/ Sponsor as any individual, who either by himself/ herself or in partnership with another entity, or group launches a mutual fund. The guarantor puts together a mutual fund to make revenue by handing the fund using its supplementary firm that essentially assumes the role of the fund investment manager.
Basically, a sponsor is almost like the company marketer as they set up the mutual fund as per the Public Trust under Indian Trust Act, 1882. They also employ people to check if the fund is functioning as specified in the SEBI guidelines, create a Resource Management Firm and ensure that the trust is listed with SEBI.
Guarantor’s Eligibility Criteria – Mutual funds entail supervising the money invested and therefore it is imperative that the fund is managed by those with qualifications and expertise.
SEBI (Mutual fund) Rules & Procedures amended in 1996 stipulates the eligibility standards as given below:
- Sponsor is expected to own or be part of a financial products and services business with at least five years of hands-on experience with positive Total Worth to his/ her credit throughout.
- Guarantor’s Net worth in the year before should exceed the wealth contributed to the firm.
- Sponsor is expected to have made good returns in at least three in the five years, particularly in the preceding year.
- Sponsor should put in a minimum of 40 percent of the Overall worth of the company. Entities that invest at least 40 percent or more is considered sponsor and hence is expected to meet all these guidelines.
Trustees – The trust is formed through a certificate known as the trust deed which is implemented by the fund sponsor in support of the trustees or representatives. They take care of the trust and are accountable to everyone who invested in the mutual fund. And they are the major custodians of the unit-holders mutual funds and properties. Representatives may be grouped in Board of Trustees or a Trustee Organization. The requirements of Indian Trust Act, 1882, oversee the board members or the firm. The trustee company is also dependent on the regulations in the Indian Companies Act, 1956.
Duties of trustees – Chosen representatives make sure that the undertakings of the mutual fund are in compliance with SEBI (mutual fund) guidelines of 1996. They see to it that the Fund Managing Company has suitable structures and processes in position. Representatives also ensure that every other fund members are selected and are meticulously managed by the AMC in the employment of members and partners. Every scheme pushed by the company must validated by the representatives. They analyze and leave no stone unturned to make sure that the overall worth of the company is as per the governing rules. They provide a report on the same to SEBI twice a year.
Monitoring the appointment of trustees – A Sponsor or Guarantor with previous authorization from SEBI employs trustees. There must be a minimum of four members in the board of trustees with at least 2/3rd independent. A trustee of one mutual fund cannot be trustee of another mutual fund, unless he is an independent trustee in both cases and has the approval of both the boards. The trustees are appointed by executing and registering a trust deed under the provisions of Indian registration Act. This trust deed is also registered with SEBI.
Everyday jobs of representatives – Functioning as a trustee is not as cushy as it appears in the beginning. The Trustees have umpteen responsibilities and onuses attached to the role according to SEBI (Mutual Funds) Regulations of 1996 along with having to constantly review the Trust Deed that constitutes the Mutual Fund, which entail the following.
The Representative and the Fund Management Firm gets into an SEBI-approved Investment Management Agreement (IMA).
This agreement will entail those clauses as are specified in the MF Regulations, Fourth Schedule along with those needed to make the investments.
The representatives will hold the right to acquire from the fund management firm all the info required.
The Trustee shall make sure prior to the inauguration of any system that the company holds or has complied with the following:
- Systems all set for its back office as well as space for accounting and dealing room.
- Selected every main official containing fund manager(s) for the Scheme(s) and given their educational certificate copies, papers certifying previous work experience in the same field etc. within two weeks after selection.
- Hired Auditors should review its accounts.
- Employed a Compliance Officer to fulfill all the company requirements and to attend to investors’ complaints and grievances.
- Employed admin officers and put forward detailed dos and donts for their regulation.
- Organized an agreement handbook and put together in-house control mechanisms entailing in-house appraisal systems.
- Itemized standards for putting the brokers, dealers and marketing agents in the panel.
Facts to remember about the Asset Management Firm – The Fund Management Firm or the Asset Management Company (AMC) as it is officially called is ideally the investment Manager of the Trust. The guarantor or the representatives is so appointed as per the specifications in the trust deed and hence the AMC becomes the ‘Investment Manager’ of the Mutual Fund through a contract known as ‘Investment Management Agreement’.
AMC has to be listed under the regulations of Companies Act of 1956. Guarantor forms the AMC and this constitutes the entity that handles the funds in the mutual fund which shells out a nominal charge to the AMC to monitor the fund and its performance though the AMC is supervised by the trustees and is subject to the rules of SEBI as well.
How influential is AMC in the performance of Mutual Funds:
The company set up to manage funds and assets is a functioning and crucial arm of the mutual fund. The onus of handling all the tasks linked to managing the mutual fund’s assets is on the AMC and it come up with different financial schemes, implements the scheme and arranges the initial investment. Once this phase is passed, they keep track of the funds and provides financial services to the shareholders. In short, AMC is the first and foremost component appointed to handle and monitor the funds post which it avails additional services of Bursar, Financiers, Dealers, Accountants, Attorneys among others and cooperates with them to complete the tasks.
Constraints on commercial activities of the Fund Management Firm:
In our country, the supervisory body has made sure that an AMC concentrates solely on its principal business and that the undertakings of AMCs do not contradict each other. These are guaranteed with the help of certain limitations imposed on the commercial activities of the company, which are listed below,
- An Assent Management Firm is not allowed to take on any business activity other than those in the likes of portfolio management services, general management and consultative services to funds in other currencies. This is applicable only if these activities do not contradict those of the mutual fund.
- Understandably the company is forbidden from investing in any of its own mutual funds unless they completely discloses their plan to capitalize (currently or in future) in the offer deed.
- The company is not permitted to take up the role of a trustee of any of its mutual funds.
Custodian/ Overseer – Although the assets are purchased and kept in the name of representatives, they are not actually held with them. The onus of safeguarding the securities is definitely on the custodian alone. Securities, which are in quantifiable form, are safely kept in with the overseer and securities in non-quantifiable form are retained with a Stock member, who does as per the custodian says. The guardian handles quite a significant back office procedure. They make sure that distribution of the securities is done and are purchased, and that they are transported as mutual fund. They also ensure that funds are paid out when securities are bought. Custodians keep the investment account of the mutual fund. They collect and account for the dividends and interest receivables on mutual fund investments. They also keep track of various corporate actions like bonus issue, rights issue, and stock split; buy back offers, open offer etc and act on these as per instructions of the Investment manager.
Duties of custodian are:
- Deliver post-transaction and supervisory services to the Mutual Fund
- Retain securities and other financial tools that belong to the fund safely
- Make sure there is a bump free influx or outflow of securities and such other financial tools as and when required keeping the best interests of investors in priority.
- Make sure that the perks enjoyed owing to the capitals in the Mutual Fund are earned back.
- Be accountable for any kind of damage to the securities owing to neglect or laxity on its part.
- The overseer generally impose a small portfolio charge, contract charge and extra expenditures in line with the terms and conditions of the Custody Agreement and in accordance with any amendment made thereof occasionally.
Other elements – Rules puts the onus on representatives to confirm that the fund managing firm maintains proper structure and processes prepared and has selected important employees and other components like R&T negotiators, dealers etc.
Registrar (record-keeper) and transfer agent – A mutual fund handles and make good use of cash capitalized by numerous unit-holders from different parts of India. Depositor checking these aspects has not only become crucial but tough too. This would normally comprise handling stockholders’ request, documenting the particulars of individuals shareholders, distributing them account reports and others regularly, paying out bonus, making modifications in information regarding stockholders and keeping depositor papers updated by putting in extra details of new depositors and by doing away with particulars about shareholders who withdraw their money from the mutual funds. It is quite unrealistic not to mention overpriced for any mutual fund to have sufficient staff throughout the country for this. Rather, they utilize individual bodies called as record-keepers and transfer agents, which usually deliver services to numerous mutual funds. This safeguards quality services and preserves the prices lesser for the unit-holders.
Accountant/ Auditor – Your money is put in a trust by the representatives and fund manager. Enforcement of directives has made sure of an accurate accounting practices to guarantee a just and transparent cataloguing of your money. They keep different account books for each mutual fund scheme and separate almanac is printed. The accounts books and the yearly accounts of the fund are reviewed by accountants or auditors. Asset Management Firm is also regarded as a company as per the Indian Companies Act of 1956 and hence their accounts must be appraised as specified by this law. So as to uphold the impeccable standards of reliability and transparency, rules and guidelines insist that the fund’s auditor and that of the company must be different.
Agents/ Brokers/ Dealers – Brokers are listed associates of the share markets whose services are accessed by fund managing companies to purchase and trade securities on the exchange of shares. Most middlemen also deliver the company, which is basically the Investment Supervisor with enquiry reports on how different AMCs segment and market position, recommended investments perform. Some guidelines have levied constraints on the participation of agents in the investment procedure of any mutual fund as mentioned below.
- If a dealer is linked to the guarantor or its assistant, then the fund management company will not buy or sell securities via that broker beyond 5five percent of the overall transaction of securities made by the mutual fund.
- For dealings via any other dealer, the company shall go beyond the set limit of five percent as long as it has documented validation in writing.
GST rate of 18% applicable for all financial services effective July 1, 2017.