Theme: Organizational aspects and procedure of mutual funds

How Mutual Funds Work - Structure

These entities are:

A sponsor is a person or organization that creates a fund. The fund sponsor is responsible for applying to SEBI and obtaining all approvals to set up a mutual fund.

Trusts and Trustees – A fund sponsor is formed by the Fund Sponsor under the Indian Trusts Act, 1882 and registered with SEBI after the sponsor gets approval from SEBI. A structured trust thus appoints trustees to manage the trust. These trustees are responsible for setting up and managing an asset management company (AMC) under the Companies Act, 1956. These trustees are an important part of the established investment fund because they are accountable to the investors.

Asset Management Company - AMC basically manages the entire investment fund. An AMC is responsible for hiring an experienced fund manager with the right skills and thorough understanding of the financial markets to manage the fund. AMCs are also responsible for introducing various schemes to suit different financial requirements of investors. Any financial scheme that the AMC decides to introduce requires the approval of the trustees.

Of course, there are other components of the mutual fund structure, such as custodians (those responsible for the custody and day-to-day management of the fund), registrars and transfer agents (RTAs) such as Karvy, CAMS, etc. ., auditors and brokers.

How do mutual funds work for retail investors?

Retail investors who want to invest in stocks are either too scared or don't have the time or inclination to do detailed research before investing. Thus, mutual funds come in handy for many investors. How do mutual funds work for retail investors?

Mutual funds pool the money of several retail investors. Retail investors receive shares in the form of units. Fund managers use their expertise to invest in stocks and bonds on behalf of investors. After the fund receives income, it is distributed to investors in proportion to their investment.