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.