Constitution and Management of Mutual funds in India

In this Article, we are going to discuss about Constitution and Management of Mutual funds in India. It is most common question for Investing in Stock Market Paper.

Constitution and Management of Mutual funds in India

Securities and Exchange Board of India has provided a four tier system for managing the affairs of mutual funds in India. The four constituents of a mutual fund association are given below:

A) Sponsor

B) Trustees

C) Asset Management Company

D) Custodians

A) Sponsor

Sponsor is a public or private company who alone or in combination with another body corporate establishes a mutual fund. Some of the most popular mutual funds sponsor in India are HDFC, SBI, NIPPON India, Life Insurance Corporation of India etc.

Eligibility criteria of Sponsor of Mutual funds

a) The sponsor has a sound financial track record for not less than 5 years.

b) He has contributed at least 40% of the net worth of the AMC.

c) He must apply for sponsorship in Form A as suggested by SEBI along with a fee of Rs. 25,000.

B) Trustees

A Mutual fund is constituted in the form of a trust and sponsor of a mutual fund appoints trustees for the mutual fund who holds the property of the mutual fund in trust for the benefit of unit-holders.

SEBI (Mutual Funds) Amendment Regulation, 1999 defines trustee as ”a person who holds the property of the mutual fund in trust for the benefit of the unit-holders and includes a trustee company and the directors of the trustee company.”

C) Assets Management Company (AMC)

Assets Management Company (AMC) is a firm which invests the funds collected from investors in securities with a view to earn high return for investors in exchange for a fee. Every mutual fund institutions appoints AMC to management its fund. Asset Management Company (AMC) manages the affairs of the Mutual Fund in relation to the operation of Mutual Fund schemes. The Asset Management Company is a key link in the success of the scheme and the interests of the unit holders. It is expected to maintain a record in support of each investment decision.

Statutory Requirements for AMCs:

(i) SEBI Approval: AMC should be approved by SEBI and cannot be changed, except unless by a majority of the trustees or by 75% of the unit-holders.

(ii) Other Conditions:

a) AMC’s Directors should be persons of standing and suitable professionals.

b) Chairman of the AMC should not be the trustee of any Mutual Fund.

c) AMC should have a minimum Net Worth of `10 Crores.

D) Custodian

Custodian is a person who is appointed by sponsor of mutual fund to ensure safe-keeping of securities and to provide custodial services.

According to SEBI (Mutual Funds) Regulations, 1996,”a person who has been granted a certificate of registration to carry on the business of custodian of securities under the Securities and Exchange Board of India (Custodial of Securities) Regulations, 1996.”