Wednesday, August 13, 2008

Mutual Funds Structure

Mutual Funds

Mutual Fund is a means for pooling the resourced and investing funds in securities in accordance with the objectives of the scheme.

They operate as Collective Investment Vehicles that pool resources by issuing units to investors and collectively invests those resources in a diversified portfolio comprising of stocks, bonds or money market instruments in accordance with the objectives disclosed in the offer document issued for purpose of pooling resources. The profits or losses are shared by the investors in proportion to their investments.

Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund.


Fig. 1: Mutual fund operation flow chart.

A Mutual Fund can fit well into the long or short term strategy of an investor. However the success of the plan depends upon the type of fund chosen. As all the funds invest in securities market, it is crucial to maintain realistic expectations about the performance of the markets and choose the funds accordingly, which best suits the investor’s needs.



Fig. 2 Structure of Mutual Funds

Mutual Fund Structure
A mutual fund is set up in the form of a trust, which has sponsor, trustees and an asset management company (AMC).

Sponsor

Sponsor is the person who acting alone or in combination with another corporate body establishes a mutual fund. He acts like a promoter of a company. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. The sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.

Trust

The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the sponsor. The trust deed us registered under the Indian Registration Act, 1908. The trust is established by a sponsor, who acts like a promoter of a company.

Trustee

Trustee is usually a corporate body or a board of Trustees. The main responsibility of the Trustee is to safeguard the interest of the unit holders and ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner.

Asset Management Company (AMC)

The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. It manages the funds by making investments in various types of securities. AMC floats and manages different investment ‘Schemes’ as per SEBI regulations. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least Rs 10 Crore at all times.

Apart from these, MF also has some other fund constituents, such as custodians and depositories, banks, transfer agents and distributors.

Custodians: Is approved for the safe keeping of securities and participating in the clearing system through approved depository.

Bankers handle financial dealings of the fund.

Transfer Agents are responsible for issue and redemption of units of MF.

Fig. 3 benefits of Mutual Funds..


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