Mutual Funds (MFs) are a financial instrument and Mutual Funds in India are constituted as trust in India. It accumulates the savings of a large number of investors and may invest them in different financial securities like stocks, bonds, Government Securities etc. or a combination of these depending upon the mandate of the mutual fund scheme. Mutual Funds in India are professionally managed by a fund manager and each investor is entitled to profits as well as losses.
Each investor owns units of the fund, representing a portion of holdings of theMF scheme. Profits or income generated and the capital appreciation realized, as a result of the investment is shared by the scheme unit holders in proportion to the number of units owned.
This makes Mutual Funds in India a suitable investment instrument for saving and investing, as it offers an opportunity to invest in diversified and professionally managed funds at minimal cost of investment.
An example of mutual fund investment would be,Rita invests Rs 100,000 in a mutual fund scheme in India. If the price of a unit of the scheme is Rs 10, then the mutual fund house will allot 10,000 units. A unit is representative of percentage ownership of the total money managed in the scheme. Mutual fund units are priced at Rs 10 during the new fund offer or NFO, when a scheme is launched in the market. The price fluctuates with change in value of the underlying assets held in the scheme portfolio.
How do mutual funds in India work
The Mutual funds in India are set up as trust and following is the structure of a typical Mutual fund.
Sponsor: The corporate body that establishes the mutual funds in India is known as a Sponsor. They contribute to at least 40% of the net worth of the investment managed to meet the eligibility criteria prescribed under the Securities and Exchange Board of India (SEBI) Mutual Funds Regulations, 1996.The sponsor is not responsible or liable for any loss or shortfall resulting from the schemes beyond the initial contribution made by it.
Trust: The mutual funds in India are constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the sponsor. The trust deed is registered under the Indian Registration Act, 1908.
Trustee: Trustee constitutes of a company (corporate body) and/or a Board of Trustees (body of individuals). The main responsibilities of the trustee include safeguarding the interest of the unit holders and ensuring that the Asset Management Company (AMC) functions always in the interest of the investors. They also keep a check on the various guidelines given by Securities and Exchange Board of India (SEBI), the provisions of the trust deed and the offer documents of the respective schemes. 2/3rd of the Trustees have to be independent individuals who are not associated with the Sponsor or Asset Management Company.
Asset Management Company (AMC): The trustee, as the investment manager of the mutual funds in India, appoints the AMC, as per the mandates of SEBI. No less than 50% of the directors of the AMC should be independent directors having no relations with the sponsor. The AMC must have a net worth of at least Rs. 50 Crore at all times.
Custodian: Custodians are a trust company, bank or similar financial institution who are registered with SEBI and is responsible for holding and safeguarding the securities owned within a mutual fund in India.
Registrar and Transfer Agent: Registrar and Transfer Agent (R&T agents)is appointed by the concerned AMC. The R&T agents process the mutual fund application forms, redemption requests and dispatches account statements to the unit holders. They also handle communication with investors, do scheme accounting and updates investor records.