Structure Of Mutual Funds In India

The structure of mutual funds in India includes three tiers: sponsors, trustees, and asset management companies (AMCs). They are all primarily involved in setting up the mutual fund and are supported by other market participants such as custodians, transfer agents, depository, banks, unit holders, etc.

This article covers: 

• What Is The Structure Of Mutual Funds?
• 3-Tier Structure Of Mutual Fund
• Sponsor In Mutual Fund
• Trust And Trustee In Mutual Fund
• Asset Management Companies
• Other Participants In The Structure Of Mutual Funds
• Mutual Fund Structure Diagram
• Example Of a Fund House Structure 
• Structure Of Mutual Funds In India- Quick Summary
• Structure Of Mutual Funds In India- Frequently Asked Questions

What Is The Structure Of Mutual Funds?

A mutual fund’s structure is three-tiered, and it starts with the setting up of a trust, which includes a sponsor, trustees, and an AMC. The sponsor(s) of a trust works like a promoter of any company. The trustees who form part of the trust hold the property of the mutual funds for the unit holders with the approval of SEBI (Securities and Exchange Board of India). 

Any mutual fund will first start by pooling money from various investors, and this money is then invested in securities as per the pre-specified objectives of the fund. The benefit or return earned on these securities is distributed to each investor after AMC deducts the expenses.

3-Tier Structure Of Mutual Fund

The three-tier structure of a mutual fund includes the sponsor, trustees, and AMC. All the mutual funds are formed as trusts under “The Indian Trust Act, 1882,” and they are regulated under the “SEBI (Mutual Funds) Regulations 1996”. The trustees are the most important players in the three-tiered structure, followed by the sponsor, who is the creator, and the AMC, who is the fund manager.

• The first tier involves the sponsor or a group of sponsors who consider starting a mutual house. For that, they have to get permission from the SEBI, and the SEBI will check the experience, net worth, etc., details of the sponsor. 

• The second tier is the trust, or public trust, which is created when the SEBI is convinced by the sponsor. This trust is formed by the people called trustees, who work on behalf of the trust. After the trust is created, it will get registered with SEBI, which is now called a mutual fund. A sponsor is not the same as a trust; they are two separate entities. Trust is a mutual fund, and the trustees act as an internal trust regulator.

• AMC is the third tier, and it is appointed by the trustees to manage the funds with the approval of SEBI. They will, in turn, charge some fees, which they will deduct from the money collected from various investors as the expense ratio. The AMC is in charge of the floating new mutual fund scheme and manages the purchase and sale of securities under the name of the trust.

Sponsor In Mutual Fund

A sponsor is an individual or an entity similar to the promoter of any company who thinks of starting up a mutual fund business. According to SEBI, a sponsor is a person who can start a mutual fund alone or in combination with another entity. They have the right to form a trust, appoint the board of trustees (BOT), and then appoint the AMC or a fund manager. The sponsor has to submit the trust deed, draft memorandum, and articles of association of AMC to SEBI.

The SEBI can conduct on-site due diligence on the sponsor’s business, which includes evaluating the existing infrastructure for client servicing, a track record of complaint and grievance handling, and the compliance philosophy and practices followed by the sponsor.

As per the SEBI MF Regulations, 1996, some criteria must be fulfilled before anyone can become a sponsor and get a “Certificate of Registration.”

• A sponsor should have a minimum experience of five years in the financial services industry.
• The business’s net worth should have been positive in the last five years.
• The net worth of the sponsor in the previous year must exceed the capital contribution of the AMC.
• The sponsor should have earned the profits in the last three out of five years after deducting depreciation, interest, and tax.
• The sponsor should be sound and physically fit.
• The sponsor has to contribute at least 40% of the net worth of the AMC.
• Existing or new mutual fund sponsors should not be found guilty of any fraud or convicted of any offense.

Trust And Trustee In Mutual Fund

A trust is created by a sponsor through trust deeds, and this trust company is governed by the Companies Act 1956. The trustees and board of trustees internally manage these trusts, which are governed by the Indian Trust Act of 1882. They do not directly manage the securities but oversee whether the regulations are being followed by AMC or not while launching the fund.

Every mutual fund house should have at least four trustees and hire an AMC with at least four directors, of which two-thirds are independent. They are hired by sponsors of the mutual fund. They cannot be appointed by the same group AMC hires. 

Here is the detailed list of work that a trustee should do: 

• Before the scheme’s launch, the trustees should check the work of AMC and their back office system, dealing room, and accounting work.
• The trustee should ensure that the AMC has not given any associate an advantage that is not in the best interests of the policyholders.
• They should check the AMC’s transactions performed according to the SEBI regulations.
• They should take remedial steps if any of the laws and regulations are not being followed by the AMC.
• The trustee shall review all the transactions of the trust and AMC, including their net worth, every quarter.
• They should check the customer’s complaint and how the AMC manages the grievance.
• They should fulfill all the details mentioned in Part A of the Fifth Schedule. They have to submit the report to the board on a semi-annual basis, which includes the details of the activities of the trust, the trustees’ certificate that they are satisfied with the AMC’s work, and all the necessary steps taken by the AMC on behalf of unit holders.

Asset Management Companies

AMCs are the companies that are appointed by trustees or the sponsor, and they are responsible for managing the fund’s portfolio and the securities in which they invest. They have their board of directors and work under the supervision of trustees and SEBI. The appointed AMC can be terminated by the majority of trustees or by the vote of 75% of the unit holders.

It is the trust’s investment manager and should not undertake any other business apart from financial services. 50% of the directors of the AMC shouldn’t be directly related to any sponsor or trustee.

The AMC’s work is to adhere to the investment scheme in line with the trust deed, provide all the related information to the unit holders, and manage the risk according to the guidelines given by AMFI and SEBI. The AMC can choose to do all the work themselves or hire third-party services from outside as well. 

Here is some of the work that AMC performs:

• The main function of the AMC is to launch schemes, receive and process the application forms submitted by various investors, issue them unit certificates, send refund orders, maintain records, repurchase and redeem units, and issue dividends or warrants. They can choose to do their work independently or hire an RTA by paying some fees.

• They will have to manage investments with the help of a fund manager. The fund manager or a team of fund managers is responsible for deciding which securities must be bought or sold at what rate, at what time, and in what quantity.

• They have to calculate the NAV of the scheme daily, maintain the records, and submit them to the AMFI website. They must prepare and distribute reports on the scheme and record all accounting transactions. Fund accounting can be assigned to specialized firms if the AMC decides to do so.

• They have to perform the work as an intermediary between the advertising agency and collection centers. They generally mobilize the funds with the help of a lead manager and attract investors. The outside firm hired will help AMCs approach HNWIs and other investors according to the SEBI guidelines.

• They must hire investment advisors to analyze the securities and market conditions. They also have to hire legal advisors to undertake all the legal work at the scheme’s launch and auditors to timely inspect and verify the accounting work of the firm.

Other Participants In The Structure Of Mutual Funds

The other participants in the structure of mutual funds are custodians, registrar and transfer agents (RTA), fund accountants, auditors, brokers, intermediaries, etc. The duties of the other participants in the structure of mutual funds are as follows: 

1. Custodian

The custodian is the entity that holds the securities purchased by the AMC in demat form on its behalf. They will manage the delivery and transfer of securities. They also complete all the work related to back-office bookkeeping. 

They will ensure that the money is paid to the seller on time and that the dividends and interest earnings are also received. They check with the benefits of AMC they should get at the time of the bonus issue or right issue. They cannot work on behalf of the AMC in buying and selling but handle the back-office work.

2. Registrar and Transfer Agent (RTA)

RTAs work to ensure smooth communication between the AMC and unitholders. The AMC can choose to do the work internally or hire an agent outside. Two RTAs handle 80% of mutual fund work in India, Computer Age Management Services (CAMS) and Karvy. RTAs perform the following tasks: 

• Issue and redeem investors’ units, thereby updating the investors’ records.
• Maintaining individual investors’ records, including the folio number, number of units each holds, contact details, KYC details, etc.
• Communicate and send the accounting reports and statements to the unitholders. They will inform them about the dividends as well.
• Maintain records of each investor in and out of the scheme daily.

3. Fund Accountant

A fund accountant is involved in calculating the mutual fund’s daily NAV from any scheme’s assets and liabilities. The AMC can choose to outsource this work to a third party or do it internally

4. Auditor

The auditor will check whether all the accounting work is being completed according to the law or not. They will have to verify if there is any fraudulent activity undertaken by the AMC by analyzing the books of account. They will take a sample of transactions in a year to check the purchase or sale at the correct NAV and also verify the same with RTA.

5. Broker

A broker is an entity or individual that attracts new investors to invest in a particular mutual fund. They will keep track of the market, generate reports, and advise AMC to invest in particular securities. They will hold a license from the SEBI to operate the investor’s trading accounts. They act as an intermediary between the investors and the mutual fund houses. 

6. Dealers 

The dealers help the AMC to successfully place the deal in the capital and money market instruments, and they have to fulfill all the formalities of purchase and sale through brokers. 

7. Intermediaries/ Distributors 

The intermediary can be anyone, be it agents, bankers, distributors, etc. They will act as an intermediary between the retail investors and AMC. They recommend the stock to investors and, in return, get a commission from the AMC.

Mutual Fund Structure Diagram

Source: BSE

The complete structure of a mutual fund. 

Example Of a Fund House Structure 

An example of an Axis mutual fund structure includes a sponsor which is Axis Bank Limited, a trust which is Axis Mutual Fund Trustee Limited, and an AMC, which is Axis Asset Management Company Limited. 

Here is the complete list of participants in the Axis mutual fund structure: 

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Structure Of Mutual Funds In India- Quick Summary

• The structure of mutual funds in India starts with the sponsor, who creates the trust, hires the trustee, and then hires an AMC to launch mutual funds.
• The three-tier structure of a mutual fund includes the sponsors, trustees, and asset management companies (AMCs).
• The sponsor of a mutual fund is the fund’s creator, who creates a body of trustees and hires an AMC.
• A trust is a mutual fund and is created under the Indian Trusts Act 1882. The trustee, or board of trustees (BOT), is responsible for overseeing the work of the trust internally.
• Asset management companies are the companies that manage all the work of the mutual fund with the help of a fund manager and other parties.
• Other participants in the structure of mutual funds include the custodians, RTAs, fund accountants, auditors, brokers, dealers, and intermediaries.
• The mutual fund structure diagram starts with creating the trust and ends with the distribution of units by the agents or distributors.
• An example of a fund house structure includes Axis Bank as a sponsor, Axis Mutual Fund Trustee Limited as a trust, and Axis Asset Management Company Limited as an AMC. 

Structure Of Mutual Funds In India- Frequently Asked Questions

1. What is the structure of mutual funds in India?

The structure of mutual funds in India is three-tiered: the first is the sponsor, the second is the trust and trustee, and the third is the asset management company (AMC).

2. Who determines the structure of a mutual fund?

The SEBI determines the structure of a mutual fund in India and regulates the mutual funds under the SEBI (Mutual Funds) Regulations, 1996.

3. How are funds of funds structured?

Funds of Funds (FOF) work differently from mutual funds because they invest in other mutual funds, not in market securities. They come under SEBI’s Mutual Funds category of solution-oriented and other funds, and each fund is managed by specific AMCs.

4. What is the structure of a fund?

The structure of a fund starts with the execution of a trust deed by the sponsor to create a mutual fund trust, which is followed by an AMC that helps manage the trust’s securities and launches the scheme wherein the securities are kept safely with the custodians.