How does the Mutual Fund industry work ? 😎
A mutual fund is an organisation or company where people like you & me come together, give your money to the organisation to manage it with the objective stated in the offer document (agreement). These organisations invest into various asset classes like equities, bonds, etc.
⚡️Any mutual funds have to register themselves with Indian Trust Act, 1882. They’re not registered as a company. The following is the structure of MF industry :
1. Sponsor - The person/ company who starts a Mutual Fund. For example, HDFC Mutual Fund is started by HDFC Bank and Standard Life Investments.
2. Trustee - They are the group of persons or companies whose board of directors look after the mutual fund whether that MF is doing any illegal activities or not, having proper allocation or not, etc. Like, HDFC Trustee Company LTd. i a trustee for HDFC MF. The trustee does not look into the matter of day to day activities. They can be seen as primary guardians of funds and assets.
3. Asset Management Company - The asset management company acts as the fund manager or as an investment manager for the trust. A small fee is paid to the AMC for managing the fund. The AMC is responsible for all the fund-related activities. The AMC is bound to manage funds and provide services to the investor. For example, HDFC AMC.
4. Custodian - A custodian is responsible for the safekeeping of the securities of the mutual fund. They manage the investment account of the mutual fund, and ensure the delivery and transfer of the securities. They also collect and track the dividends & interests received on the mutual fund investment. There are multiple custodians also. For example, HDFC AMC has 3 custodians i.e., HDFC Bank, Citi Bank and Deutsche Bank.
5. Registrar and Transfer Agents (RTA) - The main function of RTA is to safeguard the investors like if you don’t get a dividend or anything which is declared by the MF, you can contract the RTA. It is stated in the Statement of Additional Information (SAI). For example, CAMS is the Registrar and Transfer Agents for HDFC Mutual Fund.
6. Auditor - Auditors keep the record books of accounts and annual reports of various schemes. Each AMC hires an independent auditor to analyse the books so as to keep their transparency and integrity intact.