The structure of mutual funds in India is a vital framework that governs the operations and management of these investment vehicles. Understanding this structure is crucial for both new and seasoned investors. At its core, the Indian mutual fund ecosystem comprises key entities such as Asset Management Companies (AMCs), trustees, sponsors, investment managers, custodians, and Registrars and Transfer Agents (RTAs). Each entity plays a distinct role in the functioning of mutual funds, from managing investments and ensuring regulatory compliance to safeguarding investor assets and maintaining transaction records.
This article provides a concise overview of the structure of mutual funds in India, shedding light on the roles and responsibilities of each entity and offering insights into how this framework shapes the landscape of investment opportunities for Indian investors.
Structure of Mutual Funds in India
In India, mutual funds have a 3-tiered structure. They are:
- Sponsor
- Trustees
- Asset Management Company (AMC)
Let us check the structure and its components in detail.
Tier 1: Sponsor
It is the sponsor who approaches SEBI (Securities and Exchange Board of India), the securities watchdog in India, asking for permission to set up a mutual fund. As a first step, it set up a Public Trust and register it with the securities watchdog. Hence, it can be said that the sponsor is the main entity that:
- Creates the mutual fund
- Regulates the public money
- Appoint both trustees and AMC
A sponsor fulfil 4 main eligibility criteria. They are:
- Out of the 5 years, the sponsor make the fund profitable in a minimum of 3 years.
- The sponsor must have an experience of at least 5 years in financial services
- For all the 5 years previously, the sponsor’s net worth should be positive.
- The sponsor’s net share must be at least 40% of the AMC
Tier 2: Trustees
With the help of a trust deed, a sponsor first creates a trust in the trustees’ favour.
They protect the fund, track the growth of the fund, maintain the trust of the investors. A sponsor appoints a trustee to:
- Manage the trust
- Get registered with the Securities and Exchange Board of India (SEBI)
- Protect the interest of the unit holders
Adhere to the mutual fund regulations of SEBI
Whether an AMC is working in accordance with the regulations of SEBI is overseen by the trustees. After every six months, the trustees prepare and submit a fund report to the SEBI.
Tier 3: AMCs
The full form of AMCs is Asset Management Companies. In the mutual fund’s 3-tier structure, AMCs come in the third tier. It is the Asset management Company that issues different mutual fund schemes in accordance with the specific needs of the target audience group, their risk profile, and expected return.
Responsibilities of all fund-related activities rests upon the asset management company. Its responsibilities span right from launching a mutual fund scheme and managing it to providing services to its investors.
Other Participants in The Structure of Mutual Funds
Investing in mutual funds involves various entities working together to ensure smooth operations, security, and transparency for investors. Here are the other participants in the structure of mutual funds in India:
1. Custodian
A Custodian is a SEBI-registered entity responsible for the secure storage of securities. Their main duties include:
- Safekeeping of securities.
- Facilitating the transfer and delivery of units and securities.
- Helping investors update their holdings periodically.
- Managing the collection of corporate benefits such as bonuses, interest, and dividends.
By maintaining secure records and handling essential tasks, custodians play a vital role in the mutual fund ecosystem, ensuring that investor assets are protected and accurately managed.
2. Registrar and Transfer Agent (RTA)
RTAs act as crucial intermediaries between Fund Managers and Investors. Their responsibilities include:
- Processing mutual fund applications.
- Assisting with investor KYC (Know Your Customer) procedures.
- Providing periodic investment statements and reports.
- Updating investor records and processing requests.
These SEBI-registered entities ensure that the administrative and operational aspects of mutual fund investments run smoothly, making it easier for investors to manage their portfolios.
3. Auditor
Auditors play a critical role in maintaining transparency and trust in mutual fund operations. Their key functions are:
- Verifying AMC (Asset Management Company) records to ensure proper use of funds.
- Certifying the absence of fraud.
- Adhering to appointment rules and publishing audit reports as mandated by the Companies Act.
By conducting thorough audits, these professionals ensure that the AMC is compliant with regulations and that investor interests are safeguarded.
4. Broker
Brokers, authorised by SEBI, are licensed to manage trading accounts and execute trades on behalf of the AMC. They provide:
- Execution of buy and sell orders in the stock market.
- Research reports used by AMCs for due diligence.
Brokers act as a bridge between the AMC and the stock market, ensuring that trades are conducted efficiently and in the best interest of investors.
5. Intermediaries
Intermediaries include agents, bankers, distributors, and other entities registered with SEBI. Their roles involve:
- Recommending mutual funds to investors.
- Acting as a bridge between retail investors and AMCs.
- Receiving commissions from the AMC as compensation for their services.
These intermediaries help investors navigate the mutual fund market, providing valuable advice and facilitating investment decisions.
Final words
The structure of mutual funds includes sponsors, trustees, and AMCs. In addition, there are other entities too in the structure such as custodians, RTA (Registrar and Transfer Agent), brokers, auditors, and intermediaries.
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