Structure of Mutual Funds
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and a custodian. The trust is established by a sponsor or more than one sponsors who is like a promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit-holders. The AMC, approved by SEBI, manages the funds by making investments in various types of securities. The custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
Three key players namely sponsor, mutual fund trust, and asset management company (AMC) are involved in setting up a mutual fund. They are assisted by other independent administrative entities like banks, registrars, transfer agents, and custodians (depository participants).
Sponsor means any person who acting alone or with another body corporate establishes a mutual fund. The sponsor of a fund is akin to the promoter of a company as he gets the fund registered with SEBI. The sponsor forms a trust and appoints a Board of Trustees. He also appoints an Asset Management Company as fund managers. The sponsor, either directly or acting through the Trustees, also appoints a custodian to hold the fund assets. The sponsor is required to contribute at least 40% of the minimum net worth of the asset management company.
Mutual Funds as Trusts
A mutual fund in India is constituted in the form of a public Trust created under the Indian Trusts Act, 1882. The sponsor forms the Trust and registers it with SEBI. The fund sponsor acts as the settler of the Trust, contributing to its initial capital and appoints a trustee to hold the assets of the Trust for the benefit of the unit- holders, who are the beneficiaries of the Trust. The fund then invites investors to contribute their money in the common pool, by subscribing to ‘units’ issued by various schemes established by the Trust as evidence of their beneficial interest in the fund. Thus, a mutual fund is just a ‘pass through’ vehicle. Most of the funds in India are managed by the Board of Trustees, which is an independent body and acts as protector of the unit -holders’ interests.
Asset Management Company
The trustees appoint the Asset Management Company (AMC) with the prior approval of SEBI. The AMC is a company formed and registered under the Companies Act, 1956, to manage the affairs of the mutual fund and operate the schemes of such mutual funds. It charges a fee for the services it renders to the mutual fund trust. It acts as the investment manager to the Trust under the supervision and direction of the trustees. The AMC, in the name of the Trust, floats and then manages the different investment schemes as per SEBI regulations and the Trust Deed. The AMC should be registered with SEBI. The AMC of a mutual fund must have a net worth of at least Rs. 10 crore at all times and this net worth should be in the form of cash. It cannot act as a trustee of any other mutual fund. It is required to disclose the scheme particulars and base of calculation of NAY. It can undertake specific activities such as advisory services and financial consultancy. It must submit quarterly reports to the mutual fund. The trustees are empowered to terminate the appointment of the AMC and may appoint a new AMC with the prior approval of the SEBI and unit-holders. At least 50% of the directors of the board of directors of AMC should not be associated with the sponsor or its subsidiaries or the trustees.
The mutual fund is required, under the Mutual Fund Regulations, to appoint a custodian to carry out the custodial services for the schemes of the fund. Only institutions with substantial organizational strength, service capability in terms of computerization, and other infrastructure facilities are approved to act as custodians. The custodian must be totally delinked from the AMC and must be registered with SEBI.
Under the Mutual Fund Regulations (SEBI, 1996), a mutual fund is allowed to float different schemes. Each scheme has to be approved by the trustees and the offer document is required to be filed with the SEBI. The offer document should contain disclosures which are adequate enough to enable the investors to make informed investment decision, including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor. If the SEBI does not comment on the contents of the offering documents within 21 days from the date of filing, the AMC would be free to issue the offer documents to public.
The Mutual Fund Regulations lay down certain investment criteria that the mutual funds need to observe. There are certain restrictions on the investments made by a mutual fund. These restrictions are listed down by SEBI. The moneys collected under any scheme of a mutual fund shall be invested only in transferable securities in the money market or in the capital market or in privately placed debentures or securitised debts. However, in the case of securitised debts, such fund may invest in asset backed securities and mortgaged backed securities. Furthermore, the mutual fund having an aggregate of securities which are worth Rs. 100 million (approximately USD 2.15 million) or more shall be required to settle their transactions through dematerialised securities.
Limitation of Fees and Expenses
The Mutual Fund Regulations lay down certain restrictions on the fees that can be charged by the AMC and also caps the expenses that can be loaded on to the Fund. The AMC can charge the mutual fund with investment and advisory fees subject to the following restrictions -
For schemes launched on a no load basis, the AMC can collect an additional management fee not exceeding 1% of the weekly average net assets outstanding in each financial year. In addition to the aforesaid fees, the AMC may charge the mutual fund with the initial expenses of launching the schemes and recurring expenses such as marketing and selling expenses including agents’ commission, if any, brokerage and transaction cost, fees and expenses of trustees, audit fees, custodian fees etc.
The Mutual Fund Regulations also lay down a cap on the initial expense and the ongoing expense that can be borne by a scheme. In respect of a scheme, initial expenses, they cannot exceed 6% of the initial resources raised under that scheme and any excess over the 6% initial issue expense shall be borne by the AMC. Ongoing expenses (excluding issue or redemption expenses) including the investment management and advisory fee cannot exceed the following limits -
In addition to the above provisions, the Mutual Fund Regulations, 1996 and 2001 lay down several compliance/ filing requirements pertaining to reporting to the SEBI, guidelines for calculation of Net Asset Value, disclosure requirements, accounting norms, etc.