Constitution and Management of Mutual Fund

A Mutual fund is formed as trust, which has sponsor, trustees, Asset Management Company (AMC) and custodian. Sponsor is like the promoters of a company. More than one sponsor establishes the trust. They take initiative for promoting the Mutual Fund. Trustee is the person/ firm/company/institutions who look after the assets of the mutual fund for the benefit of the unit holders. Normally, bankers, insurance companies are appointed as trustees, who supervise the assets of the mutual fund. Asset Liability Management Company (ALM) manages the ‘funds’ which is mobilized by mutual fund. ALM is expertise in the field of investment portfolio and approved by SEBI. They take care of Mutual funds’ investments in various types of securities in a diversified manner. Custodian is the person/company who/which holds the securities of various schemes of the fund in his/its custody and who/which is registered with SEBI.

The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. The registration of mutual funds under SEBI is mandatory.

Sponsor

The sponsor is a body corporate which initiates the launching of a mutual fund. As per SEBI norms, it should have minimum 5 years of experience in the relevant field of financial services with good track record and its’ contribution of capital must be 40% of the net worth of the Asset Management Company. It appoints trustees, an asset management company and custodians.

Trustees

Trustee is a manager of another’s property. In mutual fund he holds the assets of mutual fund for the benefit of unit holders. The trust should be constituted under the provisions of Indian Trust Act.

Contents of Trust Deed

The trust deed shall contain such clauses as are mentioned in the third Schedule to the Indian trust Act and such other clauses which are necessary for safeguarding the interests of the unit holders.

No trust deed shall contain a clause which has the effect of- limiting or extinguishing the obligations and liabilities of the trust in relation to any mutual fund or the unit holders; or

Indemnifying the trustees or the asset management company for loss or damage caused to the unit holders by their acts of negligence or acts of commissions or omissions.

Approval of the Board for Appointment of Trustee

No trustee shall initially or any time thereafter be appointed without prior approval of the Board.

The existing trustees of any mutual fund may form a trustee company to act as a trustee with the prior approval of the Board.

Functions of the Trustees

All assets of Mutual fund should be kept under the custody of trustee.

It should provide information about the schemes to SEBI and Unit Holders.

It can appoint an asset management company for floating of mutual fund schemes.

It has rights to dismiss the AMC appointed by it.

It has power to monitor and supervise the activities of AMC

Rights and Obligations of the Trustees

The trustees and the asset management company shall with the prior approval of the Board enter into an investment management agreement.

The trustees shall have a right to obtain from the asset management company such information as is considered necessary by the trustees.

The trustees shall ensure that an asset management company has been diligent in empanelling the brokers, in monitoring securities transactions with brokers and avoiding undue concentration of business with any broker.

The trustees shall ensure that the transactions entered into by the asset management company are in accordance with these regulations and the scheme.

The trustees shall be accountable for, and shall be the custodian of, the funds and property of the respective schemes and shall hold the same in trust for the benefit of the unit holders in accordance with these regulations and the provisions of trust deed.

The trustees shall take steps to ensure that the transactions of the mutual fund are in accordance with the provisions of the trust deed.

The trustees shall be responsible for the calculation of any income due to be paid to the mutual fund and also of any income received in the mutual fund for the holders of the units of any scheme in accordance with these regulations and the trust deed.

The trustees shall quarterly review all transactions carried out between the mutual funds, Asset Management Company and its associates.

The trustees shall periodically review all service contracts such as custody arrangements, transfer agency of the securities and satisfy it that such contracts are executed in the interest of the unit holders.

Asset Management company acts as investment manager and manages the affairs of Mutual Fund. It is appointed by the sponsor or the trustees. It should have a sound track record with a net worth of at least ` 100 crores. All schemes of the fund are operated by AMC and it is responsible for it. It may also operate as an underwriter with the approval of SEBI.