Mutual Fund India

What is the structural arrangement of a Mutual Fund in India?

Mutual funds in India function under a 3-tier structure. The promoters or sponsors intending to float a mutual fund appoint trustees and set up an AMC, which in turn appoints a custodian/depository, registrars, transfer agents and auditors.

The mutual fund industry in India and all the participants involved in this business are governed by SEBI. A sponsor or promoter first applies SEBI to get a registration in order to start mutual fund activities. SEBI grants a certificate of registration if the sponsors fulfill the necessary criteria of experience, profitability, positive net worth, etc.

Next, the sponsor forms a trust under the provisions of the Indian Trusts Act, 1882, appoints trustees and forms a board of trustees. The composition of the board of trustees is governed by SEBI. For example, a certain number of trustees have to be independent persons, not associated with the sponsors in any manner whatsoever. The trustees play a critical role as they 'hold in trust' the investments of the investors/shareholders of the mutual fund. The trust deed contains clauses that are necessary for protecting the interest of the unit holders. In general, the trustees act as a self-regulating body and protectors of the unit holders' money.

The board of trustees does not manage the day-to-day activities of the mutual fund directly. Instead, it appoints an Asset Management Company (AMC) to perform the task. Normally an AMC is registered under India's Companies Act of 1956. It may be a private limited or a wholly owned subsidiary of a public limited company or even a joint venture.

SEBI also requires that AMCs have a certain minimum net worth contributed by the sponsors. Thus, de facto, an AMC manages a mutual fund scheme while, de jure the trustees manage them. The trustees also monitor the performance of the AMC and ensure that it complies with various regulations of SEBI.

Having organized its structure comprehensively, an AMC is ready to float various schemes, each one tailored to the requirements of different sections of the public. An AMC may appoint separate fund managers for each scheme under its umbrella or may assign two or three schemes to a specific fund manager.

One of the most important aspects of this multi-tiered organization structure in the mutual fund business is to clearly segregate the involvement of sponsors. The trust company and the board of trustees form the proverbial Chinese wall between promoters of the mutual fund India business and the money invested by millions of unit holders.