how mutual fund works with example step by step

SEBI has stipulated the legal structure under which mutual funds in India need to be constituted.
· Mutual funds are constituted in India as Trusts.
· Mutual Funds are governed by the Indian Trusts Act, 1882
· The mutual fund trust is created by one or more Sponsors, who are the main persons behind the mutual fund business.
· Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust, are the investors who invest in
various schemes of the mutual fund.
· The Trust acts through its trustees.
· Day to day management of the schemes is handled by an Asset Management Company (AMC) who are appointed by
the sponsor or the Trustees.
· The trustees execute an “investment management agreement” with the AMC, setting out its responsibilities.
· Although the AMC manages the schemes, custody of the assets of the scheme (securities, gold, gold-related
instruments & real estate assets) is with a Custodian, who is appointed by the Trustees.
· Investors invest in various schemes of the mutual fund. The record of investors and their unit-holding may be
maintained by the AMC itself, or it can appoint a Registrar & Transfer Agent (RTA).
· The application to SEBI for registration of a mutual fund is made by the sponsor/s.
· The sponsor should have a sound track record and reputation of fairness and integrity in all business transactions. The
requirements are:
– Sponsor should be carrying on business in financial services for not less than 5 years
– Sponsor should have positive net worth (share capital plus reserves minus accumulated losses) in all the immediately
preceding 5 years
– Net worth in the immediately preceding year should be more than the amount that the sponsor contributes to the capital
of the AMC
– The sponsor should have earned profits, after providing for depreciation and interest and tax, in three of the previous five
years, including the latest year
· The sponsor needs to contribute a minimum 40 percent of the net worth of the AMC.
· Sponsors have to contribute a minimum of Rs. 1,00,000 as an initial contribution to the corpus of the mutual fund.
· A person who is guilty of moral turpitude cannot be appointed as a trustee
· A person convicted of any economic offense or violation of any securities laws cannot be appointed as trustee
· No AMC and no director (including independent director), officer, employee of an AMC shall be eligible to be appointed
as a trustee of a mutual fund
· No person who is appointed as a trustee of a mutual fund shall be eligible to be appointed as trustee of any other
mutual fund.
· Prior approval of SEBI needs to be taken, before a person is appointed as a Trustee.
· The sponsor will have to appoint at least 4 trustees. If a trustee company has been appointed, then that company
would need to have at least 4 directors on the Board.
· At least two-thirds of the trustees / directors on the Board of the trustee company would need to be independent
trustees
· The trustees shall ensure that the interests of the unit holders are not compromised in any of the AMC’s dealings with
brokers, other associates and even unit holders of other schemes.
· Day to day operations of asset management is handled by the AMC.
· Prior approval of the trustees is required, before a person is appointed as a director on the board of the AMC.
· At least 50 percent of the directors should be independent directors i.e. not associates of or associated with the
sponsor or any of its subsidiaries or the trustees.
· The AMC needs to have a minimum net worth of Rs. 50 crore.
· Chief Investment Officer (CIO) is responsible for overall investments of the fund.
· Securities Analysts support the fund managers through their research inputs
· Securities Dealers help in putting the transactions through the market.
· Chief Marketing Officer (CMO), is responsible for mobilizing money under various schemes.
· Chief Operations Officer (COO) handles all operational issues.
· Compliance Officer needs to ensure all legal compliances.
· AMCs are required to invest seed capital of 1 percent of the amount raised subject to a maximum of Rs.50 lakh in all
growth options of the mutual fund schemes throughout the lifetime of the scheme.
· The custodian has custody of the assets of the fund.
· The Custodian is appointed by the trustees
· A custodial agreement is signed between the trustees and the custodian.
· An independent custodian ensures that the securities are indeed held in the scheme for the benefit of investors.
· The custodian also tracks corporate actions such as dividends, bonus and rights in companies where the fund has
invested.
· The RTAs maintains investor records. Eg are CAMS and KARVY.
· The functions of the RTAs includes processing of purchase and redemption transactions of the investor
· The appointment of RTA is done by the AMC.
· It is not compulsory to appoint an RTA.
· Auditors are responsible for the audit of accounts.
· The auditor appointed to audit the scheme accounts needs to be different from the auditor of the AMC.
· The scheme auditor is appointed by the Trustees, the AMC auditor is appointed by the AMC.
· The fund accountant performs the role of calculating the NAV, by collecting information about the assets and liabilities
of each scheme.
· Distributors have a key role in selling suitable types of units to their clients.
· The investors’ money go into the bank account of the scheme in which they have invested in.
· To do away with multiple KYC formalities with various intermediaries, SEBI has mandated a unified KYC for the
securities market through KYC Registration Agencies registered with SEBI.
· Distributors who have a valid NISM-Series-V-A: Mutual Fund Distributors certificate and a valid ARN can carry out the
In-person verification if they have completed the KYD process.