Mutual Fund Structure and Constituents

India follows a three-tier system of mutual funds with various components in it.

In the Mutual Fund structure, there are three main groups involved: the sponsor (who starts the fund), the trustees, and the asset management company (which manages the fund).

Let’s look at these in detail:

Fundsponsor

The Fund Sponsor is the initial layer in the three-tier structure of Mutual Funds in India. According to SEBI regulations, a fund sponsor establishes the mutual fund to make money by managing funds.

To be eligible as a sponsor, SEBI has set criteria:

• The sponsor must have at least five years of experience in financial services and maintain a positive net worth for all of those years.

• In the most recent year, the sponsor's net worth must exceed the capital contribution of the Asset Management Company (AMC).

• The sponsor must demonstrate profits in at least three out of the past five years, including the most recent year.

The sponsor must possess at least a 40% share in the net worth of the asset management company.

Trust and Trustees

They are the guardians of the fund and the second level of this three-tiered system.

The trustee's role is vital because they oversee the mutual fund, which holds money for many investors. They make sure that the funds are managed in the investors' best interests. Although trustees don't handle daily fund management, they establish general rules and check compliance to protect small investors. Their job includes outlining AMC's responsibilities, monitoring new schemes, and ensuring compliance with regulations.

Asset Management Companies 

The day-to-day operations of a mutual fund are managed by the AMC. The AMC is appointed by the sponsor or trustees, with SEBI's approval as per the trust deed.

According to SEBI regulations, the directors of the asset management company must have sufficient professional experience in finance and related fields. They and the key personnel should not have been involved in any moral wrongdoing, convicted of economic offences, or violated securities laws.

Furthermore, key personnel of the AMC should not have worked for any asset management company, mutual fund, or intermediary during periods when their registration was suspended or cancelled by SEBI.

An AMC needs to maintain a minimum net worth of 50cr and the head is appointed by the Trustee.

Brokers

Brokers play a crucial role in attracting investors and managing funds. Asset Management Companies (AMCs) rely on brokers to trade securities in the stock market. Brokers analyze market trends and predict future movements, providing valuable research reports and recommendations to AMCs for their strategic decisions.

Custodians

The custodian is responsible for looking after the fund's assets. This includes handling the buying and selling of securities for the different schemes of the fund. So, they make sure all transactions for the mutual fund schemes are settled properly.