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Institutional Framework of Mutual Fund Industry

Introduction

A mutual fund is not a single entity. It's a carefully designed 3-tier structure mandated by SEBI to ensure investor protection. Let's understand who does what.

The 3-Tier Structure

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Why 3 tiers?

  • Separation of ownership and management (like Company Law: Shareholders → Board → CEO)
  • Prevents fraud (no single entity controls everything)
  • Investor money held in trust (cannot be misused)

Tier 1: Sponsor

Who? The promoter/founder of the mutual fund

  • Banks (SBI, HDFC, ICICI)
  • Financial institutions (LIC, UTI)
  • Foreign entities (Franklin Templeton)

Role:

  1. Establishes the mutual fund
  2. Appoints the trustees (Board of Trustees)
  3. Invests capital to set up the AMC
  4. Acts as the ultimate promoter

Eligibility (SEBI Norms):

  • Minimum 5 years of financial services experience
  • Net worth of ₹5 crore (for corporate sponsor)
  • Clean track record (no SEBI penalties)

Example:

  • HDFC Bank is the sponsor of HDFC Mutual Fund
  • State Bank of India is the sponsor of SBI Mutual Fund

Tier 2: Trust & Trustees

Legal Structure: Mutual fund assets are held in a Public Trust registered under Indian Trust Act

A. Trust

  • Legal owner of all fund assets (stocks, bonds, cash)
  • Exists for the benefit of investors (unitholders)
  • Cannot be used for any other purpose

B. Trustees (Board of Trustees)

Composition: Minimum 4 trustees

  • At least 2/3rd must be independent (not associated with sponsor)
  • Cannot have more than 50% common with other AMC boards

Responsibilities:

  1. Oversee AMC operations (like a watchdog)
  2. Approve launch of new schemes
  3. Ensure compliance with SEBI regulations
  4. Review portfolio holdings quarterly
  5. Protect investor interests
  6. Appoint auditors and custodians

Comparison to Corporate Structure:

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Tier 3: Asset Management Company (AMC)

Who? The operational company that manages the fund

Role:

  1. Investment Decisions: Fund managers decide which stocks/bonds to buy/sell
  2. Scheme Management: Launch new schemes, manage existing ones
  3. NAV Calculation: Daily calculation and publication
  4. Investor Services: Handle subscriptions, redemptions, queries
  5. Compliance: Follow SEBI regulations
  6. Marketing: Distribute schemes, educate investors

Structure:

  • Board of Directors: Strategic decisions
  • Fund Managers: Portfolio management
  • Research Team: Stock analysis
  • Operations Team: NAV, settlements
  • Compliance Officer: SEBI reporting

Example: HDFC AMC Ltd.

  • Manages HDFC Mutual Fund schemes
  • Employs 500+ people
  • Separate company listed on stock exchange

Supporting Entities

1. Registrar & Transfer Agent (RTA)

Role: Maintain investor records

  • KYC verification
  • Allotment of units
  • Process redemptions
  • Send account statements
  • Handle investor queries

Major RTAs: CAMS, Karvy

2. Custodian

Role: Physical custody of securities

  • Hold shares/bonds on behalf of fund
  • Settle trades
  • Collect dividends/interest
  • Corporate action tracking

Example: HDFC Bank Custodial Services

3. Auditors

Role: Annual audit of accounts

  • Verify NAV calculations
  • Check compliance
  • Report to SEBI

4. Fund Accountant

Role: Daily accounting

  • Calculate NAV
  • Portfolio valuation
  • Expense tracking

SEBI's Role

Regulator: Securities and Exchange Board of India

Functions:

  1. Registration: All MFs must register with SEBI
  2. Regulations: Issue guidelines (SEBI MF Regulations 1996)
  3. Monitoring: Inspect AMCs, review compliance
  4. Investor Protection: Grievance redressal
  5. Penalties: Can suspend/cancel registration

Summary: Complete Framework

SEBI (Regulator)
    ↓
Sponsor (Promoter) → Appoints
    ↓
Trustees (Board) → Oversee
    ↓
AMC (Manager) → Manages
    ↓
Mutual Fund Schemes
    ↓
Investors (Unitholders)

Supporting: RTA, Custodian, Auditors

Exam Notes: Writing the Answer

Question: "Explain the organizational structure of mutual funds in India." (10 Marks)

Answering Structure:

  1. Introduction: "MF industry has 3-tier structure mandated by SEBI..."
  2. Tier 1: Sponsor (promoter, eligibility)
  3. Tier 2: Trust & Trustees (oversight role, independent majority)
  4. Tier 3: AMC (operations, fund management)
  5. Supporting Entities: RTA, Custodian, Auditors
  6. SEBI: Regulatory oversight
  7. Diagram: Draw the hierarchy

Quiz Time! 🎯

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