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A fund’s pillars

If you want realistic expectations from your mutual fund, want to choose rightly between funds and evaluate your options in case of investment problems, it’s important for you to know the players that comprise a fund.

twitter-logoSameer Bhardwaj | Print Edition: March 19, 2009

If you want realistic expectations from your mutual fund, want to choose rightly between funds and evaluate your options in case of investment problems, it’s important for you to know the players that comprise a fund. All funds have four main constituents— sponsors, trustees, asset management companies (AMCs) and custodians. Apart from these, the registrar and transfer agents also play important roles. While all mutual funds follow rigorous disclosure and accountability rules in accordance with the Securities and Exchange Board of India’s (Mutual Funds) Regulations, 1996, here is what you should know about the role of each constituent.

Sponsor: The sponsor takes the initiative to launch and set up a mutual fund. It can be a registered company, scheduled bank or a financial institution. For instance, Prudential Plc and ICICI Bank are the sponsors for the Prudential ICICI mutual fund. A sponsor must satisfy certain conditions, including having the requisite capital, a good track record (at least five years’ operation in financial services), default-free dealings and a reputation for fairness. The sponsor appoints trustees, the AMC and the custodian in accordance with the Sebi regulations. Once the AMC is formed, the sponsor is just a stakeholder.

Trustee: The trustees have a fiduciary responsibility towards unitholders to protect their interests. They float and market the schemes and secure necessary approvals. They check that the AMC’s investments are within the defined limits, that the fund’s assets are protected, and ensure that the unitholders get their due returns. The new fund offerings have also to be approved by the trustees before being floated.

Asset management company: The AMC is the face of the company and manages your money. Appointed by trustees to manage the schemes and the corpus, the AMC functions under the supervision of its own board of directors and on the instructions of the trustees and Sebi. An AMC takes investment decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV, and provides information on listed schemes and secondary market unit transactions.

Custodian: Often, an independent organisation, such as a bank, takes the custody of securities and other assets of a mutual fund. The custodian is appointed by the trustees for safekeeping the physical securities. The dematerialised securities holdings are held in a depository through a depository participant. The custodian and depositories work under the instructions of the AMC and the direction of the trustees. The registrar and transfer agents are responsible for issuing and redeeming units of the mutual fund and providing other related services, such as preparing the transfer documents and updating the investor records.

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