Mutual Funds Structure

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.

Financial Sponsors

Asset Management Structure Depository Asset Management Company Fund Sponsor Trustees Agent Custodian Financial Asset Management Structure Depository Fund Sponsor Asset Management Company Trustees Agent Custodian Mutual Fund Structure Depository Asset Management Company Fund Sponsor Trustees Agent Custodian

• Definition:Rectangles: The sponsor isRepresent the entityprimary thatentities initiatesinvolved: theFund establishmentSponsor, ofTrustees, aand mutualAsset fund.Management They are akin to the promoters of a company.Company.
• Role:Rounded Rectangles: Represent the service providers: Depository, Agent, and Custodian.
• Arrows: Indicate the flow of responsibility and relationships.

Participants and Their Roles

1. Fund Sponsor:

   • ConceptualizesRepresented andby setsa uprectangle on the far left, indicating its role as the initiator of the mutual fund.
   • AppointsSymbolized by an icon of people and money, signifying its role in bringing together investors' capital.
   • Role: The entity that conceives the initial trustees and the Asset Management Company (AMC).
   • Contributes at least 40%idea of the netmutual worthfund, ofestablishes the AMC.
   fund,
   • Registersand theregisters mutual fundit with the regulatory authorityauthorities. (e.g.,It's SEBIanalogous into India).the promoter of a company.

2. Eligibility (Example: In India, as per SEBI):Trustees:

   • SoundRepresented trackby recorda and general reputation for fairness and integrity in financial dealings.
   • At least five years of experiencerectangle in the financialmiddle, servicesconnected industry.to the Fund Sponsor by an arrow.
   • PositiveSymbolized netby worthan foricon of a building with pillars and a target, representing stability, oversight, and the preceding five years.
   • Profits after depreciation, interest, and tax in at least threeprotection of theunitholder immediately preceding five years, including the latest year.
3. 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.interests.
• Role:
  Appointed
  • Holdby the propertyFund ofSponsor, the mutualtrustees fundhold the fund's assets in trust for the benefit of the unitunitholders holders.
  (investors).
  • OverseeThey are responsible for overseeing the activitiesoperations of the AMCfund, toensuring ensureit complianceacts in accordance with regulationsthe trust deed, regulations, and the scheme'sbest objectives.
  interests
  • Approveof 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.investors.

• 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)

:
• Represented by a rectangle to the right of the Trustees, connected by an arrow.
• Symbolized by an icon of a building with a graph, indicating its role in managing investments and growing the fund's assets.
• Definition:Role: TheAppointed by the Trustees, the AMC is responsible for managing the investmentsday-to-day management of the mutualfund's fund.investments. ItThis isincludes making investment decisions (buying and selling securities), conducting research, and administering the fund's operations.

4. Depository:

   • Represented by a companyrounded approvedrectangle on the far right, connected to the AMC by an arrow.
   • Symbolized by an icon of a safe, representing the regulatorysecure authoritystorage (e.g.,of SEBI in India).securities.
   • Role:
     • ManagesHolds the day-to-dayfund's operationssecurities ofin the mutual fund.
     • Makes investment decisionsdematerialized (buyselectronic) form, ensuring their safekeeping and sellsfacilitating securities)electronic 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).transactions.

   • Appointment:Agent:

     Appointed
     • Represented by thea sponsorrounded orrectangle below the trustees.AMC, connected by an arrow.
     • Symbolized by an icon of people and a briefcase, representing the intermediary role between the fund and investors.
     • EligibilityRole: (Example: In India,Acts as pera SEBI):distributor
       or
       • Soundbroker, 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 ofselling the mutual fund's assetsunits (securities).to investors. They may also provide investment advice to investors.

   • Custodian:

     • Represented by a rounded rectangle below the Agent, connected by an arrow.
     • Symbolized by an icon of a person, representing the entity responsible for safeguarding the fund's assets.
     • 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 behalfcustody of the fund.
       fund's
       • Settlesassets (securities), ensuring their safekeeping and managing related transactions (deliverye.g., ofcollecting securitiesdividends, whensettling sold, receipt of securities when purchased)trades).

Appointment:

Flow Appointedof byResponsibility

The arrows in the trustees.diagram illustrate the flow of responsibility:

1. The Fund Sponsor initiates the fund and appoints the Trustees.
2. The Independence:Trustees In many jurisdictions (including India),appoint the custodianAMC mustto bemanage independentthe investments.
3. The AMC utilizes the services of the sponsorDepository, Agent, and Custodian to avoidcarry conflictsout ofits interest.functions effectively.

5.Conclusion

Transfer

The Agentsimage (Registrarprovides a clear and Transferconcise Agentsvisual - 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 unitsrepresentation of the mutual fund schemes.
structure.
• It Rights:
  • Beneficial ownership ofhighlights the assetskey ofparticipants the– schemeFund inSponsor, proportionTrustees, toAMC, Depository, Agent, and Custodian – and their holdings.
  respective
  • Receive dividends (if declared under the dividend option).
  • Participateroles in the growthestablishment, of the fund's NAV (under the growth option).
  • Right to informationmanagement, 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.
• The Complianceflowchart Officers:format Ensureeffectively thatdemonstrates the AMCflow of responsibility and the fund comply with regulations.

Interrelationships

The participantsinterconnectedness of athese mutualentities fundin are interconnected and work together to ensureensuring 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.
protection

Conclusion

The various participants inwithin 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.fund.