Participants of Mutual Funds

Mutual funds involve several key participants, each playing a distinct role in their creation, operation, and regulation. Here's a breakdown of the major players:

1. Sponsors

• Definition: The sponsor is the entity that initiates the establishment of a mutual fund. They are akin to the promoters of a company.
• Role:
  • Conceptualizes and sets up the mutual fund.
  • Appoints the initial trustees and the Asset Management Company (AMC).
  • Contributes at least 40% of the net worth of the AMC.
  • Registers the mutual fund with the regulatory authority (e.g., SEBI in India).
• Eligibility (Example: In India, as per SEBI):
  • Sound track record and general reputation for fairness and integrity in financial dealings.
  • At least five years of experience in the financial services industry.
  • Positive net worth for the preceding five years.
  • Profits after depreciation, interest, and tax in at least three of the immediately preceding five years, including the latest year.
• Example: A large financial institution or a corporate entity with a strong financial background can be a sponsor.

2. Trustees

• Definition: Trustees are the guardians of the mutual fund's assets and are responsible for protecting the interests of the unit holders.
• Role:
  • Hold the property of the mutual fund in trust for the benefit of the unit holders.
  • Oversee the activities of the AMC to ensure compliance with regulations and the scheme's objectives.
  • Approve the appointment of key personnel, auditors, and custodians.
  • Monitor the fund's performance and ensure transparency.
  • Enter into an Investment Management Agreement with the AMC.
• Structure:
  • Can be a board of trustees (individuals) or a trustee company.
  • In India, at least two-thirds of the trustees must be independent (not associated with the sponsors).
• Responsibilities:
  • Ensure the fund is managed according to the trust deed and regulations.
  • Review transactions, net worth, and performance of the AMC.
  • Approve new schemes and ensure proper disclosure.
  • Safeguard the interests of the unit holders.

3. Asset Management Company (AMC)

• Definition: The AMC is responsible for managing the investments of the mutual fund. It is a company approved by the regulatory authority (e.g., SEBI in India).
• Role:
  • Manages the day-to-day operations of the mutual fund.
  • Makes investment decisions (buys and sells securities) on behalf of the fund.
  • Conducts research and analysis to identify investment opportunities.
  • Floats new schemes (after approval from trustees and regulators).
  • Ensures compliance with investment objectives and restrictions.
  • Calculates and declares the Net Asset Value (NAV).
• Appointment: Appointed by the sponsor or the trustees.
• Eligibility (Example: In India, as per SEBI):
  • Sound track record and experience in financial services.
  • Minimum net worth requirement.
  • Board of directors with at least 50% independent directors.
  • Key personnel with relevant experience and no record of misconduct.

4. Custodian

• Definition: The custodian is responsible for the safekeeping of the mutual fund's assets (securities).
• Role:
  • Holds the securities (shares, bonds, etc.) owned by the mutual fund.
  • Ensures the physical or dematerialized safekeeping of assets.
  • Collects dividends, interest, and other income on behalf of the fund.
  • Settles transactions (delivery of securities when sold, receipt of securities when purchased).
• Appointment: Appointed by the trustees.
• Independence: In many jurisdictions (including India), the custodian must be independent of the sponsor to avoid conflicts of interest.

5. Transfer Agents (Registrar and Transfer Agents - R&T Agents)

• Definition: Transfer agents maintain the records of unit holders.
• Role:
  • Process applications, redemptions, and transfers of units.
  • Maintain records of unit holder transactions (purchases, sales, switches).
  • Issue account statements and other communications to unit holders.
  • Handle dividend payouts and other corporate actions.
• Appointment: Appointed by the AMC.

6. Unit Holders

• Definition: The investors who purchase units of the mutual fund schemes.
• Rights:
  • Beneficial ownership of the assets of the scheme in proportion to their holdings.
  • Receive dividends (if declared under the dividend option).
  • Participate in the growth of the fund's NAV (under the growth option).
  • Right to information and disclosures about the fund's performance and operations.
  • Right to vote on certain matters (e.g., winding up of a scheme).

7. Auditors

• Role:
  • Conduct independent audits of the mutual fund's financial statements.
  • Verify compliance with accounting standards and regulations.
  • Provide an audit report to the trustees, which is included in the annual report.
• Appointment: Appointed by the trustees.

8. Regulatory Body (e.g., SEBI in India)

• Definition: The regulatory authority that oversees the functioning of mutual funds in a particular jurisdiction.
• Role:
  • Frame regulations and guidelines for the operation of mutual funds.
  • Register and approve mutual funds, AMCs, and other participants.
  • Monitor compliance with regulations.
  • Conduct inspections and investigations.
  • Protect the interests of investors.
  • Take enforcement actions against violations.
  • Promote the development of the mutual fund industry.

9. Distributors/Brokers/Advisors

• Role:
  • Distribute mutual fund schemes to investors.
  • Provide investment advice (in the case of advisors).
  • Earn commissions on the sale of mutual fund units (in regular plans).
• Types:
  • Banks
  • Independent Financial Advisors (IFAs)
  • Brokerage firms
  • Online platforms

10. Other Service Providers

• Legal Advisors: Provide legal counsel to the mutual fund, trustees, and AMC.
• Fund Accountants: Maintain the accounting records of the fund.
• Compliance Officers: Ensure that the AMC and the fund comply with regulations.

Interrelationships

The participants of a mutual fund are interconnected and work together to ensure the smooth functioning of the fund. Here's a simplified view of their relationships:

• Sponsors initiate the mutual fund and appoint the Trustees and the AMC.
• Trustees oversee the AMC and appoint the Custodian and Auditors.
• AMC manages the fund's investments, appoints Transfer Agents, and works with Distributors to market the schemes.
• Unit Holders invest in the fund and benefit from the services of all other participants.
• The Regulatory Body oversees the entire ecosystem, ensuring compliance and protecting investor interests.

Conclusion

The various participants in a mutual fund structure play crucial roles in ensuring its proper functioning, transparency, and investor protection. Understanding these roles and their interrelationships is essential for investors to make informed decisions and for the overall health of the mutual fund industry.