Mutual funds short notes 2

Chapter 2

• Mutual Fund is established as a trust. Therefore, they 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.

• Day to day management of the schemes is handled by an Asset

Management Company (AMC). The AMC is appointed by the sponsor or the

Trustees.

• Sponsor should be carrying on business in financial services for 5 years.

Sponsor should have positive net worth (share capital plus reserves

minus accumulated losses) for each of those 5 years. Latest net worth

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, in three of the previous five

years, including the latest year. The sponsor needs to have a minimum

40% share holding in the capital of the AMC.

• Prior approval of SEBI needs to be taken, before a person is appointed as

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. Further, at least two-thirds of the trustees /

directors on the Board of the trustee company, would need to be

independent trustees i.e. not associated with the sponsor in any way.

• Day to day operations of asset management is handled by the AMC.

• The directors of the asset management company need to be persons

having adequate professional experience in finance and financial services

related field. The directors as well as key personnel of the AMC should not

have been found guilty of moral turpitude or convicted of any economic

offence or violation of any securities laws. Key personnel of the AMC

should not have worked for any asset management company or mutual

fund or any intermediary during the period when its registration was

suspended or cancelled at any time by SEBI.

• Prior approval of the trustees is required, before a person is appointed as 

director on the board of the AMC. Further, at least 50% of the directors

should be independent directors i.e. not associate 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. 10crore. An AMC

cannot invest in its own schemes, unless the intention to invest is disclosed

in the Offer Document. Further, the AMC cannot charge any fees for its

own investment in any of the schemes managed by itself.

• The appointment of an AMC can be terminated by a majority of the

trustees, or by 75% of the Unit-holders. However, any change in the AMC is

subject to prior approval of SEBI and the Unit-holders.

• The custodian has custody of the assets of the fund. As part of this role, the

custodian needs to accept and give delivery of securities for the purchase

and sale transactions of the various schemes of the fund. Thus, the

custodian settles all the transactions on behalf of the mutual fund

schemes.

• All custodians need to register with SEBI. The Custodian is appointed by the

mutual fund. A custodial agreement is entered into between the trustees

and the custodian.

• The SEBI regulations provide that if the sponsor or its associates control

50% or more of the shares of a custodian, or if 50% or more of the directors

of a custodian represent the interest of the sponsor or its associates, then

that custodian cannot be appointed for the mutual fund operation of the

sponsor or its associate or subsidiary company.

• The custodian also tracks corporate actions such as dividends, bonus and

rights in companies where the fund has invested.

• The RTA maintains investor records. The appointment of RTA is done by the

AMC. It is not compulsory to appoint a RTA. The AMC can choose to handle

this activity in-house. All RTAs need to register with SEBI.

• Auditors are responsible for the audit of accounts. Accounts of the schemes

need to be maintained independent of the accounts of the AMC. The

auditor appointed to audit the scheme accounts needs to be different from

the auditor of the AMC. While 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.