Presentation of and policies for Fund accounting in India

Presentation of accounts:

Mutual funds , should prepare schemewise balance sheet as per Annexure IA and IB of Eleventh Schedule of SEBI (Mutual Funds) Regulations 1996. As per regulation 54, every mutual fund or asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and funds.

The balance sheet shall give schemewise particulars of its assets and liabilities and shall contain particulars as per Eleventh Schedule. It should also disclose accounting policies relating to valuation of investments and other important items. Under each type of investment, the aggregate carrying value and market value of non-performing investments shall be disclosed. It should also indicate the extent of provision made in revenue account for the depreciation /loss in the value of non -performing investments. It shall also disclose per unit Net Asset Value (NAV) as at the end of accounting year. Previous year figures should also be given against each item.

It should also indicate the appropriation of surplus by way of transfer to reserves and dividend distributed. It should also contain -

• Provision for aggregate value of doubtful deposits, debts and outstanding and Accrued income.
• Profit or loss in sale and redemption of investment may be shown on a net basis.
• Custodian and registrar fees.
• Total income and expenditure expressed as a percentage of average net assets, calculated on a weekly basis.

Schemewise balance sheet normally contains the information under following groups -

Asset side - Investments, Deposits, Other Current Assets, Fixed Assets, Deferred revenue expenditure

Liability side - Unit capital, Reserves and surpluses, Loans, Current liabilities,

Accounting Policies:

Accounting policies of mutual fund schemes are somewhat different from those of an industrial concern. Ninth schedule to SEBI (Mutual Fund) Regulations 1996 deal with accounting policies and standards to be adopted by a mutual fund.

The accounting policies generally cover the following areas -

1. Basis of Accounting
The fund maintain its books of account on an accrual basis.

2. Portfolio Valuation
Investment are stated at market/fair value at the balance sheet date/date of determination. In valuing the scheme's investments.

(i) Securities listed on a recognized stock exchange are valued at the last quoted price on the principal exchange on which the security is traded.

(ii) Money market instruments are valued at fair value as determined in good faith by Asset Management Company (AMC)

3. Securities Transactions
Investment securities transactions are accounted for on a trade date basis. The scheme uses the average cost method for determining the realized gain or loss on sale of investments.

4. Investment Income
Dividend and interest income are recorded on an accrual basis.

5. Deferred Revenue Expenditure
Initial issue costs comprise those costs directly associated with the issue of units of the scheme and include brokerage/incentive fees on issue of units, advertising and marketing costs, registrar fees and expenses and printing and despatch cost, which are being amortized over a period of ten financial years.

6. Dividend Equalization Reserve
The net distributable income relating to units issued/repurchased is transferred from/to Dividend Equalization Reserve for Dividend Plan for determining the net surplus/deficit transferred to /from Unit Premium Reserve.

The Scheme does not intend to declare dividends or make any other distribution in respect of units held under the Growth Plan and accordingly has not accounted for Dividend Equalization in respect of this plan during the year.

7. Unit Premium Reserve
Upon issue and redemption of units, the net premium or discount to face value of units is adjusted against the Unit Premium Reserve of the Scheme, after an appropriate portion of the issue proceeds and redemption payout is credited or debited respectively to the Dividend Equalization Reserve.

The Unit Premium Reserve is available for dividend distribution except to the extent it is presented by unrealized net appreciation in value of investments and deferred revenue expenditure.

8. Agent's Commission
Agents commission expenses are not considered as distribution charges.

Unit trusts Vs Oeics

Unit trusts and open ended investment companies (Oeics) are forms of shared investments, or funds, that allow investor to pool his money with thousands of other people and invest in world stock markets. Unit trusts have proved incredibly popular because investors money is invested in a broad spread of shares and their risk is reduced. But they are gradually being replaced by their modern equivalent, the Oeic.

Oeics (pronounced 'oiks') were first sold to UK investors in 1997. The FSA's(Finan Services Authority) rules governing which types of fund can convert to Oeics were relaxed in 2001 and since then, the majority of fund management groups have converted their unit trusts to Oeics or launched these funds.

Investors can invest in a unit trusts and Oeics on monthly or lump sum, which means it can be a relatively painless way to get a foothold in the stock market. Typically you they pay an initial charge of 5% to 6% and an annual management charge of between 1% and 1.75%.

The differences

Unit trusts and Oeics are both open-ended investments, which means that investors can freely buy and sell shares in the fund, which then grows or shrinks accordingly. It means the value of the shares they own in an Oeic, or units in a unit trust, always reflects the value of the fund's assets.

But there are a few key differences…

Pricing: When investing in unit trusts, you buy units at the offer price and sell at the lower bid price. The difference in the two prices is known as the spread. To make a return on your investment the bid price must rise above the offer before you sell the units. An Oeic fund has a single price, directly linked to the value of the fund's underlying investments. All shares are bought and sold at this single price, so there is no need to calculate the spread. The Oeic has been described as a 'what you see is what you get product'.

Flexibility: An Oeic fund can offer different types of share or sub fund to suit different types of investor, so private individuals can invest in the same funds as large institutions and pension fund managers. The expertise of different fund management teams can be combined to benefit both large and small investors, while streamlining the administration and management costs of the fund. Clients receive less paperwork, as each Oeic will produce one report and accounts for all sub funds, instead of separate reports for each fund.

Complexity: In legal terms, unit trusts are much more complex. In fact, this is the main reason for their rapid conversion to Oeics. Unit trusts entitle an investor to participate in the assets of the trust, without actually owning those assets. Investors in an Oeic, meanwhile, buy shares in that investment company. The ownership of unit trusts is divided into units. These rise and fall in value in line with the share price performance of the fund's underlying assets.

Management: With unit trusts, the fund's assets are protected by an independent trustee and are managed by a fund manager. Oeics are protected by an independent depository and managed by an authorised corporate director.

Charges: Unit trusts and Oeics usually have an up-front buying charge, typically 3%-5%, and an annual management fee of between 0.5% and 1.5%. It is possible to reduce these charges by investing through a discount broker or fund supermarket, but this means acting without financial advice. Charges on Oeics are pretty transparent. Any initial charge is shown as a separate item on your transaction statement - so the whole transaction is clear and easy to understand.

Oeics are cheaper to run than unit trusts because they can contain a number of sub-funds, rather than each unit trust needing to be a separate entity. This cuts down on the costs of administration. In theory, this should lead to lower charges for investors.

SWING PRICE

Type of funds as per pricing

Funds may be either single price funds or dual price funds. Dual price funds publish two NAV's one for subscription and another for redemption. Since single price have only one NAV, so huge incoming subscriptions or redemptions can impact exixting unit holders NAV if transaction cost is charged to fund.

Introducing swing pricing

When an investor buys or sells shares in an investment fund, the fund incurs dealing costs. Absent a mechanism protecting the interests of other shareholders, these costs are shared across all of the fund’s shareholders. As a result, the activity of one shareholder can be to the detriment of other investors in the fund. Swing pricing is a technique designed to reduce the negative impact of subscriptions and redemptions on “non-trading” investors in a fund. This approach to pricing is being used by a growing number of fund managers.

How does swing pricing work?

Conceptually, in some respects swing pricing is similar to dual-priced funds that require investors to deal on a bid-offer basis, except that swing pricing is used for single-priced funds. With swing pricing, a single price is issued, and all clients buy and sell at this price. To calculate the dealing price, the funds’ administrator calculates the net asset value (NAV) for the fund before consideration of capital activity – subscriptions and redemptions – and then adjusts (“swings”) the NAV by a pre-determined amount. The direction of the swing depends on whether the fund is experiencing net inflows or net outflows on the dealing day, while the magnitude of the swing is based on pre-determined estimates of the average trading costs in the asset class.

• If the fund is experiencing net inflows, the NAV is adjusted upwards.

• If the day’s dealings generate a net outflow, the NAV is adjusted downwards.

These adjustments serve to insulate non-dealing shareholders from the trading costs triggered by the dealing shareholders. Swing pricing can be used on either a full or partial basis. With full swinging, the

price swings every day regardless of the size of the net capital flows. With partial swinging, the price swings only if the net capital flows exceed a pre-determined threshold.

Implications of swing pricing for investors

One of the key principles of swing pricing is that any investor transacting at a volume that would materially impact other fund investors should bear the costs of their trading. The nature of the partial swing pricing mechanism, however, means that if the net trading in the fund does not meet the threshold of materiality, no swing occurs as trading costs do not have a material impact on other shareholders.

The mechanics: determining swing magnitude and thresholds

The extent to which prices are swung depends on the costs of trading in the particular asset class. To determine the extent of price swing for a particular fund, investment team calculates a swing adjustment factor based on broker commissions, taxes and other trading-related charges, and foreign exchange costs where relevant. The investment team then makes a recommendation to Pricing Committee, who makes the final determination. The Committee also sets the threshold of net subscriptions or redemptions which will trigger price swinging. Swing adjustment factors and thresholds are reviewed on a regular basis. Common with industry best practice to reduce the chance that some investors may try to “game” their trading activity in the funds, it is not our intention to notify investors in advance if the thresholds or swing factors change. However, details are available on request.

Other implications of swing pricing

Investors should be aware of the impact of price swinging on a number of aspects of a fund’s administration and performance:

• Performance is measured and reported using swung prices. Since it is possible that prices could have swung on either or both the initial or ending date over a period in which performance is being measured, it is possible that the returns of the fund are influenced by trading activity in the fund, as well as the

performance of the fund’s investments.

• Price swinging can increase the variability of the fund’s returns, causing the fund to appear to have slightly higher risk levels than would be expected based on the underlying holdings. However, as price swinging benefits a fund’s long term investors, best practice is to measure performance based on the swung

price.

• Performance-related fees are not based on swung prices. Performance fees are intended to remunerate managers based on the success of their investment decisions, and should not be influenced by fund investors’ transaction activity. Also, as performance fees are crystallised on specific

dates, if the fee was based on a swung price the amount of the fee could be materially distorted. Therefore, performance fees are calculated using unswung (and un-published) prices. This process is, of course, monitored carefully by the funds’ auditors.

Valuation of Debt Securities in India

Debt funds and Valuation Debt funds like any other asset are driven by the same basic tenet. A fair valuation is one that has to take into account market realities at prices that are market driven. A debt fund at any given point in time holds different debt instruments. Thus the NAV, which reflects the value of all the underlying assets in the portfolio, to be fair and correct should take into account the market price of each of the instruments that comprise the portfolio. This process where each asset is valued at current market prices is called "Marking to Market". Marking to market has become very essential as it indicates the financial health of a portfolio. To a large extent this procedure indicates the amount of risk the fund carries. Essentially any portfolio can either have liquid or illiquid securities. While valuing liquid securities is a no-brainer as the prices can be taken from the exchanges, valuation does assume great significance when it comes to valuing illiquid securities. The problem of valuation gets compounded when it comes to valuing debt securities in India. The absence of a broad based market resulted that trades were concentrated around a few securities. A Debt fund at any given point of time can hold three different types of assets. • Government securities • Corporate debentures with a residual maturity of more than 6 months • Money market instruments and corporate debentures with a residual maturity of less than 6 months Different categories of assets are marked to market in different ways depending mainly on the liquidity of the asset. As a thumb rule, higher the credit, higher the liquidity. Consequently the most liquid among debt instruments are the securities issued by the Government as the risk is sovereign. Bond Valuation The value of a bond can be defined as the present value of the future cash flows discounted at an appropriate rate. The cash flows expected from the bond are made up of a) Coupon payments and b) Redemption of Principal. Bond Price= C/(1+i) + C/(1+I)2 + C/(1+I)3+ …..+ C/(1+I)n +M/(1+I)n Where C = Coupon Payments M = Redemption Amount N = Number of Coupon Payments i = Discounting rate or the yield of the bond. Yield or the Discounting Rate The price of the bond depends significantly on the rate which is used to discount the future cash flows. To get a uniform pricing for various debt instruments a matrix known as the CRISIL Bond Valuer maintained and developed by CRISIL and approved by SEBI is used for bond valuation. Valuing Government Securities Government securities are marked to market on a daily basis. Since the G Sec market in our country is the most liquid segment of our debt markets, it is possible to get a price of G-Secs on any given day. Hence the G-sec portion of the portfolio is marked to market on a daily basis at the last traded price. Earlier fund houses used differing sources ranging from NSE to the RBI's SGL. However circa March 2002 it is mandatory for all fund houses to use prices provided by CRISIL. CRISIL uses the Spread over Benchmark concept while valuing non traded government securities. Any event like an interest rate change triggers the rise or fall of government securities. But the impact is not similar across all G-Secs. The impact depends on a host of factors chiefly duration, coupon rate and the liquidity level of the security. Benchmarks are set up for different tenor buckets e.g. securities with 1-2 years outstanding maturity, 2-3 years 3-4 years and so on. For each of these tenor buckets benchmarks are identified based on the turnover, frequency of trading in the secondary market. These prices are provided by CRISIL on a daily basis. Valuing Corporate Securities Debt securities like bonds, debentures are valued differently depending on whether they are traded or non- traded and additionally depending on the value of the traded securities. The valuation for the traded securities of traded value in excess of Rs 5 crores is done based on the YTM. The YTM is calculated on the last traded price and is maintained till the next CRISIL matrix. Thinly traded securities and non-traded securities valued at more Rs 5 crores and with a residual maturity of more than 182 days are valued using the Crisil Bond Valuer. The Crisil Bond Valuer uses a benchmark YTM built using GOI Sec as the base for each duration bucket. There are 7 duration buckets starting from 0.5 to > 6 years. CRISIL provides a matrix of yields across various duration buckets (the most row in the table below) and rating categories (the leftmost column) on a weekly basis. Here is how it works. When deciding the price of a corporate debenture the key is to determine the yield of the debenture. CRISIL arrives at this table after taking into account various macro and micro economic factors and the repaying capacity. Once the yield is known the price computation is easily accomplished.

23/10/2002 Average 0.5-1 1.0-2.0 2.0-3.0 3.0-4.0 4.0-5.0 5.0-6.0 >6.0 Gilt 6.46% 5.85% 6.01% 6.17% 6.31% 6.54% 7.05% 7.28% AAA 7.21% 0.75% 0.87% 0.83% 0.80% 0.78% 0.59% 0.64% AA+ 7.58% 1.11% 1.16% 1.08% 1.05% 1.14% 1.11% 1.19% AA 7.95% 1.45% 1.43% 1.40% 1.40% 1.63% 1.54% 1.62% AA- 8.47% 1.95% 1.89% 1.86% 1.89% 2.15% 2.10% 2.26% A+ 9.15% 2.60% 2.62% 2.62% 2.65% 2.84% 2.73% 2.78% A 9.73% 3.00% 3.18% 3.22% 3.30% 3.52% 3.39% 3.33% A- 10.66% 3.70% 4.16% 4.31% 4.28% 4.41% 4.31% 4.28% BBB+ 11.59% 4.47% 5.03% 5.22% 5.25% 5.38% 5.28% 5.28%

If you buy a bond at face value, its rate of return, or yield, is just the coupon rate. However, after they're first issued, bonds rarely sell for exactly face value. The yield differs from the coupon. While the coupon rate is the stated interest rate offered by the debenture and is always calculated on the principal value, the yield is often the return that one would get considering the future interest flows and the prevailing interest rate scenario. To give an example using the above matrix say a corporate debenture issued by a Corporate rated AA+ with a residual duration of 2.5 years would be calculated as under. The yield of this will be the benchmark yield plus the markup depending on the bucket the debenture falls into. Therefore yield used for valuation would be 6.17(benchmark)+1.08(spread) =7.25%. All corporate debentures that fall in a particular slot within the matrix are valued at rates specified by CRISIL matrix. Additionally the fund house is at a liberty to add a discretionary discount/premium upto +100/-50 bps for rated paper with duration upto 2 yrs and upto +75/-25 bps for rated paper with duration over 2 yrs. In case of an unrated paper the fund house needs to assign an internal credit rating which is then used for valuation. In this case the yield would be marked up by adding 50 basis points for securities having a duration upto two years and by 25 basis points for securities of duration higher than two years. Valuing Money Market instruments Money market instruments and corporate debentures with residual maturity of less than 6 months are valued by amortization. The difference between the face value and the cost is amortised over the life of the instrument. SEBI has provided that all money market instruments and corporate debentures maturing within 6 months have to be valued on a cost plus accrual basis instead of marking to market. So the next time you decide to invest in a fund you know what to look out for. Valuation therefore is a critical element of the entire funds management business. It takes time and hence funds have cut-off times so that all transactions for the day can be accounted for the days NAV. Any transaction that gets missed out implies that the resulting NAV is not the accurate NAV. It is for this reason that AMFI along with SEBI has started getting stricter on adherence to cut-off times.

Accounting for Derivatives in India

ACCOUNTING FOR DERIVATIVES

Who decides accounting regulations for derivatives?

Accounting is regulated in India by the Institute of Chartered Accountants of India (ICAI) which issues Accounting Standards and Guidance Notes from time to time on various areas. The ICAI has issued Guidance Notes for the Accounting of Index Futures and Options. The Options accounting Guidance Note covers both Index Options and Stock Options. No Guidance is available for the accounting of Stock Futures at the moment.

How do we account for initiation of an Index Futures contract?

When you buy (or sell) an Index Futures contract, you pay an Initial Margin amount to your broker. This amount paid is treated as a Current Asset and shown in your Balance Sheet.

The notional value of the contract will be far higher than the amount of margin paid. The Notional Value of the contract is not accounted in the books because you are not paying this value, nor are you liable to pay this value in the future.

What happens to daily settlement mark to market margins?

At the close of each trading day, the broker is required to debit you for mark to market losses and credit you for mark to market profits. The ICAI has taken a stand that these profits and losses are not in the nature of accounting accruals. Hence, they will not be taken to the profit and loss account on a daily basis. These amounts, whether paid or received, will be reflected under Current Assets in the Balance Sheet along with the Initial Margin amount earlier reflected.

What happens when I square up my contract?

When you square up your contract, the entire profit or loss on the contract (which is the sum of all the daily mark to market profits and losses from the date of initiation to the date of squaring up) will be taken to the profit and loss account representing realized profits on square up. The brokers account will be appropriately debited or credited for the second impact of the transaction. The broker will pay (or receive) the margin which will be appropriately accounted.

Thus, realized profits/losses are taken to Profit & Loss Account while unrealized profits/losses are retained in the Balance Sheet as far as day to day accounting is concerned.

What if Margins are paid in non cash forms?

Initial Margins can be paid in the form of cash, cash equivalents (treasury bills, Government securities, debt securities, bank guarantees, fixed deposits) or equities. In the case of payment by cash, the above accounting practice will be followed. If margins are paid in non cash forms, no accounting entry will be required. In the Notes to the Accounts, the fact that such margins have been paid will be disclosed.

How is accounting for the year end effected?

As discussed above, unrealized profits are not recognized for the purposes of daily accounting. However, at the year end the enterprise is required to work out the unrealized profits or losses on all the index futures contract open on the last day. If the net impact of all such index futures contracts is a profit, no further accounting is required as unrealized profits are not accounting as per regular conservative principles. However, if the net impact of all such contracts is a loss, the enterprise is required to provide for such losses. Thus, the enterprise will on the hand debit the Profit & Loss Account and on the other hand create a liability towards this unrealized loss.

How are Options accounted at Initiation?

If you are a buyer of a Call (or a Put), you will pay a premium on the day of initiation of the

contract (or soon thereafter). This premium amount is reflected as a Current Assets in your

Balance Sheet.

If you are a seller of the Call (or the Put), you will receive this premium on the day of initiation or soon thereafter. This amount of premium received is reflected as a Current Liability in your Balance Sheet.

How are Margins accounted?

In the Options market, buyers are not required to pay any margins and hence the question of accounting will not arise. Sellers are required to pay margins which will be accounted as

Current Assets in their Balance Sheets if paid in cash. If paid as cash equivalents or equity,

there is no accounting entry required, but a disclosure in the Notes will be necessitated.

Such margins will be similarly accounted whether paid on the day of initiation or paid sometime later during the life of the Option Contract.

What happens when the Option is squared up?

Options can be squared up in the following ways:

a) Sale of a purchased Option

b) Purchase of a sold Option

Exercise by the Buyer (resulting in square up for the exercising Buyer and a seller chosen by a computer algorithm) Expiry On square up by way of purchase or sale, you will realize a profit or a loss. For example if you had bought an Option for Rs 23 and you have now sold it for Rs 34, you have made a profit of Rs 11. This profit will be taken to the Profit & Loss Account.

In the case of exercise, the buyer will receive intrinsic value (difference between the strike price of the option and the closing price of the underlying) and the seller will pay this intrinsic value.

This intrinsic value will be treated as the transaction price and accordingly, profit or loss will be determined. The accounting implications will remain the same as above.

In the case of expiry, the option may or may not close in the money. If it closes in the money, the buyer will receive intrinsic value and the seller will pay the same amount. The accounting will remain the same as above. If the option closes at or out of the money, the buyer will receive nothing. The entire option price paid by him (and reflected as a Current Asset in the Balance Sheet) will not be written off to the Profit & Loss Account as an expense.

The seller will not pay any amount to the buyer on expiry in this situation. The entire Option Premium collected by the Seller (and taken to Current Liabilities in the Balance Sheet) will now be transferred to Income into the Profit & Loss Account.

What happens at the year end?

At the year end, you should value the Options which are open as on the last day. This valuation should be compared with your cost (if you are a buyer) and your collections (if you are a seller). Unrealized profits or losses should accordingly be computed.

If you have unrealized profits, no further accounting is required. If you have unrealized losses, you need to provide for these losses in your Profit & Loss Account. The ICAI has taken a stand that if you have a number of transactions in various underlying securities, you cannot set off losses on one underlying vis-à-vis profits on another for the purpose of determination of the provision towards unrealized losses. For example, you have an

unrealized profit of Rs 8,000 on Satyam Options and an unrealized loss of Rs 3,200 on Infosys Options, you need to provide for the entire Rs 3,200 of unrealized loss. You cannot argue that the net amount is a profit if you consider Satyam and Infosys on a combined basis.

Net Asset Value(NAV) of A Fund

The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention.

Calculation of NAV

The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below.

Asset value is equal to

Sum of market value of shares/debentures

+ Liquid assets/cash held, if any

+ Dividends/interest accrued

Amount due on unpaid assets

Expenses accrued but not paid

Details on the above items

For liquid shares/debentures, valuation is done on the basis of the last or closing market price on the principal exchange where the security is traded

For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated. For shares, this could be the book value per share or an estimated market price if suitable benchmarks are available. For debentures and bonds, value is estimated on the basis of yields of comparable liquid securities after adjusting for illiquidity. The value of fixed interest bearing securities moves in a direction opposite to interest rate changes Valuation of debentures and bonds is a big problem since most of them are unlisted and thinly traded. This gives considerable leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this and adopt flexible valuation policies depending on the situation.

Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every passing day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the periodic interest payment with the number of days in each period. Thus, accrued interest on a particular day is equal to the daily interest rate multiplied by the number of days since the last interest payment date.

Usually, dividends are proposed at the time of the Annual General meeting and become due on the record date. There is a gap between the dates on which it becomes due and the actual payment date. In the intermediate period, it is deemed to be "accrued".

Expenses including management fees, custody charges etc. are calculated on a daily basis.

Mutual Fund: An Introduction

AN INTRODUCTION:

Mutual funds take funding from Public at large or HNI's in the form of subscription and Invest the proceedings in market depending on Objective of the fund. If the Fund is an Infra fund, it would invest in infrastructure scrips and so on.

Mutual funds employ Fund Managers to manage the portfolio. Investors have to pay Management and other incidental charges to the Fund. The value of Investors holding in the fund is reflected by the Net Asset Value (NAV of the fund).

FUND STRUCTURE:

Typical Structure of a Mutual Fund in India is given below:

The above diagram gives an idea on the structure of an Indian mutual fund.

Sponsor: Sponsor is essentially a promoter of the fund. For example Bank of Baroda, Punjab National Bank, State Bank of India and Life Insurance Corporation of India (LIC) are the sponsors of UTI Mutual Funds. The fund sponsor raises money from public in the form of subscription, who become fund unit holders. The pooled money is invested in the stock markets. Sponsor also appoints a trustees. See below.

Trustees: Trustees are the authority to keep a check on management of fund.Two third of the trustees are independent professionals who own the fund and supervises the activities of the AMC. It has the authority to sack AMC employees for non-adherence to the rules of the regulator. It safeguards the interests of the investors. They are legally appointed i.e. approved by SEBI.

AMC: Asset Management Company (AMC) is a set of financial professionals who manage the fund and popularly called as fund managers like Prashant Jain a renowned fund manager. It takes decisions on when and where to invest the money. It doesn’t own the money. AMC is only a fee-for-service provider.

The above 3 tier structure of Indian mutual funds is very strong and virtually no chance for fraud.

Custodian: A Custodian keeps safe custody of the investments (related documents of securities invested). A custodian should be a registered entity with SEBI. If the promoter holds 50% voting rights in the custodian company it can’t be appointed as custodian for the fund. This is to avoid influence of the promoter on the custodian. It may also provide fund accounting services and transfer agent services. JP Morgan Chase is one of the leading custodians.

Transfer Agents: Transfer Agent Company interfaces with the customers, issue a fund’s units, help investors while redeeming units. Provides balance statements and fund performance fact sheets to the investors. CAMS is a leading Transfer Agent in India.