Mutual Funds – Indirect Investing

A mutual fund represents a vehicle for collective investment. When you participate in the scheme of a mutual fund, you become part owner of the investments held under that scheme.

Till 1986, the Unit Trust of India was the only mutual fund in India. Since the Public sector banks and insurance companies have been allowed to set up subsidiaries to undertake mutual fund business. So, State Bank of India, Canara Bank, LIC, GIC, and a few other public sector banks entered the mutual fund industry. In 1992, the Mutual Fund industry was opened to the private sector, and a number of private sector mutual funds such as Birla Mutual Fund, DSP Merrill Lynch Mutual, HDFC Mutual Fund, IDBI-Principal Mutual Fund , JM Mutual Fund, Kotak Mahindra Mutual Fund, Morgan Stanley Mutual Fund, Prudential ICICI mutual Fund, Reliance Mutual Fund, Standard Chartered Mutual Fund, Tata Mutual fund and Templeton India Mutual have been set up. The process of consolidation began in recent years. For example, Templeton Mutual Fund has taken over Kothari Pioneer Mutual and HDFC Mutual Fund had taken over Zurich India Mutual Fund. At present there are about 30 Mutual funds managing nearly 1000 schemes.

While the mutual fund industry in India has registered a healthy growth over the last 15 years, it is still very small in relation to other intermediaries like banks and insurance companies.

Entities in a Mutual fund operation:

In India, the following entities are involved in a mutual fund operation: The sponsor, the mutual fund, the trustees, the asset management company, the custodian and the registrars and transfer agents.

Sponsor: The sponsor of a mutual find is like promoter of a company. The sponsor may be bank and Financial Institution service Company. It may be Indian or foreign. For example, the sponsor of Templeton Mutual fund is Templeton international Inc. The sponsor has to obtain a license from SEBI for which it has to satisfy several conditions relating to capital profits, track record, default free dealings and so on. The sponsor is responsible for setting up and establishing the mutual fund. The sponsor is the settler of the mutual fund trust. The sponsor delegates the trustee function to the trustees.

Mutual Fund: The Mutual fund is constituted as a trust under the Indian Trusts Act, 1881 and registered with SEBI. The beneficiaries of the trust are the investors who invest in various schemes of the mutual fund.

Trustees: A trust is a national entity that cannot contract in its own name. So the trust enters into contracts in the name of the trustees. Appointed by the sponsor, the trustees can be either individuals or a corporate body (a trustee company). Typically it is the latter. For example, the trustee of the Templeton Mutual Fund is the Templeton Trust Services Private Ltd a company incorporated with limited liability under the Companies Act, 1956. To ensure the trustees are fair and impartial, SEBI rules mandate that at least two thirds of the trustees are independent – this means that thy have no association with the sponsor.

The trustees appoint the asset management company (AMC) secure necessary approvals periodically monitor how the AMC functions and hold the properties of the various schemes in trust for the benefit of investors. Trustees can be held accountable of the financial irregularities of the mutual fund.

Asset management Company: The asset Management Company (AMC) also referred to as the Investment Manager, is a separate company appointed by the trusts to run the Mutual fund. For example, Templeton Asset management (India) Private Ltd., is the AMC of the Templeton Mutual Fund. The AMC should have a certificate from SEBI to act as Portfolio Managers under SEBI (Portfolio Managers) rules and regulations, 1993. The AMC handles all operation matters such as designing the schemes, launching the schemes managing investments and interacting with investors.

In return of its services, the AMC is compensated in the form of investment management and advisory fees. Each scheme of the mutual fund pays the AMC an annual investment management and advisory fees which is linked to the size of the scheme. Currently this fee is subject to the following limits: on the first Rs 100 crores of the weekly average net assets – 1.25 percent on the balance of net assets – 1.00 percent.