The Constituents Of Mutual Funds Are: Knowing how an asset actually works helps you, as an investor. It could be any sort of investment – bonds, stocks, deposits. And understanding an asset could range from figuring out how it actually makes you money, as well as your rights and obligations.
On that front, we’re going to cover what the constituents of mutual funds are today. By the end of this blog, you should know exactly what the constituents of a mutual fund are. So keep reading to find out!
The Constituents Of Mutual Funds Are
In India, Mutual funds are handled differently compared to countries such as the United States. Here, the mutual funds are set up as a unit trust. It was first defined by SEBI (Mutual Fund) Regulations, 1996.
Just like how a company has a structure and different constituents, mutual funds also have a fixed structure defined by SEBI. Mutual funds have 5 primary constituents that are all monitored and required to be registered with SEBI. They are –
A sponsor is on par with a promoter of a company. They have to register the fund with SEBI, as is required by every mutual fund.
According to SEBI, a sponsor is defined as a person or entity who establishes a mutual fund. Basically, a sponsor approaches SEBI and gets approval for the mutual fund scheme. To do that, they have to create a public trust (Indian Trust Act,1882).
This trust again has to get registered with SEBI. After being created and registered with SEBI, the Trustee has to be appointed as Trustee to the fund being registered.
This is one of the regulations made to protect unit holders (retail investors).
Now, the sponsor has to create an asset management company under the Companies Act. The purpose of the AMC is to manage funds held by the mutual fund.
Mutual funds are handled by a board of trustees. They sit on the board of the Trust appointed to manage the fund. This board is governed by the Indian Trust Act. If it is governed by a Trust Company, then it is governed by the Companies Act, 1956.
The trust/trustee’s purpose is to protect the interests of unit holders of the mutual fund. So in case, the asset management company wishes to issue new schemes, they have to be approved by the trustees.
Due to trustees, AMCs can be held accountable to follow all the rules and regulations set forth by SEBI.
3. Asset Management Company
An AMC is chosen by the board of trustees to manage the mutual fund schemes as well as the corpus of the fund. It has its own board of directors, and it also has to operate under SEBI and the trustees.
SEBI has set a limit as to the number of independent directors on the board of the AMC to ensure transparent operations.
An AMC has important responsibilities, specifically –
- Keep unit holders informed about major developments such as sales and purchases of assets.
- Invest according to the rules set forth by the Trustees
- Manage risk as per the guidelines of the Association of Mutual Funds in India.
- Regular disclosures regarding the portfolio and any major changes that may take place.
4. Custodian & Depositories
AMCs hold assets under management that are quite literally, enough to make or break the bank. Such high volumes of transactions require strict scrutiny, compliance, and record keeping. Not only that, the securities and funds themselves have to be held with the highest level of security.
This is where Custodians and Depositories come into play. Custodians are responsible for holding onto physical assets and depositories are responsible for the dematerialized securities.
Both custodians and depository work under AMC but mainly report to the trustees.
5. Registrar And Transfer Agents
Upon purchase or redemption of mutual funds, the units have to be transferred to you as the unit holder. Not only that, but the records need to reflect the units in your account. All this is done by the registrar and transfer agents. The fund may provide this service directly or depend on a third party to do it for them.
With this blog, we hope it clarifies your understanding of a mutual fund and its constituents and cleared any doubts about their structure. On that note, we have reached the end of “the constituents of mutual funds are”. Happy Investing!
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