Mutual funds are pooled investment vehicles wherein asset management companies raise capital from different retail and institutional investors. These funds tend to be diversified and invest the capital in various financial instruments such as equities, debt and commodities. But have you ever wondered what is the structure of mutual funds, and how do they work?

There are five components to an MF structure:

• Sponsors
• Trustees
• Asset Management Company (AMC)
• Custodian and Depository
• Registrar and Transfer agent (RTA)

Sponsor

As the name suggests, a sponsor is an individual or an entity that can create a mutual fund scheme to earn profits by investing the money pooled from investors.

The regulating authority of the Indian Security Market – Securities and Exchange Board of India (SEBI)– has implemented certain rules for creating a mutual fund. They are:

• Individual or entity has to first get the scheme approved from SEBI.
• Start a trust where they become the trustee to safeguard investor money.
• Open an asset management company under the laws of the Companies Act, 2013.

Trustee

A trustee is given the responsibility to ensure transparency and security in dealing with investor money. A board of trustees is selected by fund sponsors to oversee the transactions made by the asset management company (AMC). SEBI has mandated AMCs to take permission from trustees before implementing any mutual scheme.

AMC

An AMC creates new schemes of investment according to the needs of investors with the help of bankers, Registrar and Transfer agents and brokers. They get the scheme approved by trustees before it is launched for investment in the market.

There should be no miscommunication, misunderstanding or any conflict between sponsors, trustees and AMC as that is a violation of regulations laid down by SEBI. It can also result in the suspension of the registration of mutual fund schemes.

These are the three main pillars of the structure of mutual funds. However, the workings of mutual funds are handled by custodians and depositories, and registrar and transfer agents.

Custodian and depository

Custodians ensure to transfer, hold and keep track of the units held by various investors and record the transactions. They are also under the radar of SEBI and are responsible to update the units held by the investors in the mutual fund records. They are also liable to provide dividends to the investors.

Registrar and Transfer Agents (RTA)

Registrar and Transfer Agents are responsible to update the KYC and general information of investors. They also serve as an important link between sponsors and investors to provide information regarding KYC, process forms, create reports of investor holdings and issue certificates of units and dividends.

All these pillars of mutual funds are under the guidance and review of SEBI. Mutual fund investments are handled by professional fund managers on behalf of investors, while SEBI ensures transparency in transactions and safety in investments.