Structure of Mutual Funds in India

In this comprehensive blog post, we delve into the intricate architecture of mutual funds to provide a clear understanding of how they are structured.
Structure of Mutual Funds
3 min
10-June-2024

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:

  1. Sponsor
  2. Trustees
  3. 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:

  1. Out of the 5 years, the sponsor make the fund profitable in a minimum of 3 years.
  2. The sponsor must have an experience of at least 5 years in financial services
  3. For all the 5 years previously, the sponsor’s net worth should be positive.
  4. 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.

Mutual funds are considered as a good tool for investment if you don’t have time to check and reshuffle your investment portfolio. If you want to invest, the first thing you have to do is check the expected return with the help of your SIP calculator or lumpsum calculator. But which mutual fund scheme is better for you? To simplify your search, you can visit the Bajaj Finserv Mutual Fund Platform. There are 1000+ mutual fund schemes listed on the platform. Just compare mutual funds and choose the right one for your investment.

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Frequently asked questions

What is the structure of a fund of funds?
A fund of funds (FoF) structure has a general partner and limited partners. The fund operation and investment management is done by the general partners. The limited partners, on the other hand, provide the investment capital.
What are the three ways mutual funds are structured?
In India, mutual funds have a 3-tiered structure. The first tier is the sponsor, the second tier is the trust and the trustees, and the third tier is the Asset Management Company (AMC). All three participant groups play important roles in the mutual funds’ management in addition to their respective individual roles.
What is the governance structure of a mutual fund?
The governance structure of a mutual fund (MF) includes three levels. The first layer includes the sponsor, who initiates the fund. The second layer includes both the trust and the trustees. They play the most important role of holding the property of the mutual fund, on behalf of the MF’s unit holders. The third layer is the AMC or asset management company, which acts as the fund manager.
What is the structure of a money market mutual fund?
A money market mutual fund invests in high-quality securities that provide fixed income. These financial securities have short-term tenure, giving you high liquidity. The financial instruments in which these money market mutual funds invest are high-credit-rating, low-risk debt securities (such as Certificates of Deposits (CDs), Treasury Bills (T-Bills), commercial papers, etc.), cash, and cash equivalents. Money market mutual funds have a three-layered structure including a sponsor, trust/trustees, and Asset Management Company (AMC).
What is the structure of a managed fund?
The structure of a managed fund includes a custodian, an investment manager, and a responsible entity. Managed funds are open-ended funds, where units are created when investors invest in the fund and cancelled when redeemed.
What is the structure of a hedge fund?
The structure of a hedge fund is that of a limited partnership. While the investors are the partners, the management company is a limited liability company. Their fee structure includes two parts. One is the management fee and the other is the fee based on the annual performance.
Who appoints a fund manager?
A fund manager is appointed by the management company of the fund. Sometimes, a fund manager is appointed by investment management firms.
What is the difference between AMC and MF?
A mutual fund is an investment scheme, which pools money from investors and the pooled money is invested in stocks, bonds, etc. by a professional fund manager on behalf of the investors. An AMC or Asset Management Company is a financial institution that manages mutual fund operations.
What is the full form of RTA in mutual funds?
The full form of RTA in mutual funds is the Registrar and Transfer Agent. RTA acts on behalf of an AMC as a third party. It provides a wide range of services including record-keeping, administration, and others.
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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.